A new Chinese AI model called DeepSeek is shaking financial markets.
After U.S. stocks hit all-time highs during a 2-year AI boom, investors worry this could pop the bubble similar to the early 2000s tech crash.
A comparable decline today would take the S&P 500 back to pre-pandemic levels until 2028.
But can DeepSeek really trigger such a significant deflation in US stocks?
DeepSeek’s impact comes down to economics.
Compared to ChatGPT, the U.S. AI leader, DeepSeek’s input processing costs just $0.27 per million tokens versus ChatGPT’s $2.50 – making it 9.3x cheaper.
For output processing, the cost difference is similarly dramatic, with DeepSeek running 9.1x cheaper than ChatGPT.
This order-of-magnitude cost reduction could fundamentally reshape how companies approach their technology investments.
The CapEx Bubble
Major tech companies have been spending unprecedented amounts on AI infrastructure.
In Q3 2024 alone, their CapEx reached $66 billion – exceeding Luxembourg’s entire GDP.
Over the last couple of years, these companies have poured ridiculous sums into building expensive AI infrastructure.
Maginificent 7 CapEx (Cumulative Total)
DeepSeek suggests much of this spending might have been unnecessary.
But, it doesn’t pop the AI bubble – it pops the capital expenditure bubble.
This distinction is crucial for understanding market implications.
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Impact on Major Players
One big tech name that could face significant consequences from DeepSeek’s AI release is Nvidia, whic is up 1,200% since ChatGPT’s release.
It could face a lot of pressure if AI spending declines because Nvidia’s returns came directly from tech giants’ massive capital expenditures on AI chips.
With AI potentially costing 90% less, companies might drastically rethink their spending patterns, directly impacting Nvidia’s revenues and profits.
In our view, DeepSeek effectively pops the Nvidia and semiconductor bubble.
As 7% of the S&P 500, Nvidia’s fate matters.
A major hit to Nvidia could hurt the S&P 500’s performance.
However, other major tech companies comprising 21% of the index tell a different story.
Take Meta, for example.
Since 2022, Meta’s earnings have 4x, driven by AI improvements and a booming ad business.
AI has helped Meta refine ad targeting and recommendations, boosting profit margins.
If AI becomes cheaper, it could further enhance Meta’s profitability.
Similarly, companies like Alphabet, Amazon, and Apple have seen their revenue grow through distinct business models.
AI hasn’t just helped their margins, it’s amplified them.
With cheaper AI, their profits could grow even further without needing massive CapEx.
The real story here isn’t about DeepSeek killing large-cap tech…
Instead, it’s about making AI more accessible to smaller tech companies, leveling the playing field.
DeepSeek likely won’t trigger a massive decline in US stocks.
Instead, we see this as a positive development for the market.
AI clearly drives higher corporate profit margins, so larger wealth inequality that increases capital flow into financial assets like stocks, gold, and real estate.
As financial assets rise, the purchasing power of your currency declines.
AI could accelerate this phenomenon.
That’s why we’ve been bullish on financial assets for the past year and continue to recommend them to our clients at Bravos Research.
Our Current Strategy
While we turned short-term bearish as the S&P 500 hit new highs last Friday.
We warned our clients and closed some of our longs, bringing our market exposure to the lowest level since June 2024.
But, we’re planning to use this correction to increase exposure again.
In our view, DeepSeek is bullish for stocks.
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