Is DeepSeek about to cause a stock market crash?

With the stock market dominated by US tech companies focused on AI, is DeepSeek’s competitor to OpenAI about to brings things crashing down?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Burst your bubble thumbtack and balloon background

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The companies known as the Magnificent Seven make up over 20% of the global stock market. And a lot of this is based on their perceived advantage when it comes to artificial intelligence (AI). 

The big US tech firms hold all the aces when it comes to cash and computing power. But DeepSeek – a Chinese AI lab – seems to be showing this isn’t the advantage investors once thought it was.

What is DeepSeek?

DeepSeek doesn’t have access to the most advanced chips from Nvidia (NASDAQ:NVDA). Despite this, it has built a reasoning model that is outperforming its US counterparts – at a fraction of the cost. 

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

Investors might be wondering about how seriously to take this. But Microsoft (NASDAQ:MSFT) CEO Satya Nadella is treating DeepSeek as the real deal at the World Economic Forum in Davos:

“It’s super impressive how effectively they’ve built a compute-efficient, open-source model. Developments like DeepSeek’s should be taken very seriously.”

Whatever happens with share prices, I think investors should take one thing away from the emergence of DeepSeek. When it comes to AI, competitive advantages just aren’t as robust as they might initially look.

US AI

Microsoft is set to spend $80bn on AI in 2025. Very few other companies are able to do anything like this and that gives the company a huge advantage — at least, at first sight.

Investors should be careful though, in thinking about what that means. While it puts the firm in a strong position against its competitors, DeepSeek’s latest model indicates it’s not insurmountable.

Equally, Nvidia is the leader when it comes to AI chips. But while the threat from a rival catching up might be limited, the risk of demand falling as customers do more with its earlier products also needs considering.

The emergence of DeepSeek has highlighted both of these challenges. And for the biggest US tech stocks trading at high prices, I expect this to have a meaningful impact on share prices sooner or later.

Is this an opportunity?

The biggest question for investors is whether a drop in share prices is a buying opportunity. From my own perspective, I think it’s reason to be careful, but I’m also wary about overreacting. 

If there’s one thing I think investors should take from the emergence of DeepSeek, it’s that a competitive advantage in this area is harder to maintain than it might initially seem. And that cuts both ways. 

The US hyperscalers might have just seen their lead cut — or even eliminated entirely — by DeepSeek. But I think counting them out when it’s just been shown how hard it is to stay ahead in this industry is very reckless.

I don’t expect them to stay behind for long, but the question is whether they can ever establish a long-term lead. Apparently, big advantages in cash and computing power don’t guarantee this.

Warren Buffett 

Warren Buffett has been staying away from AI – and tech in general – following his misjudged investment in IBM. And I think a lot of investors would be wise to consider following his example. 

It turns out, assessing who has a durable edge when it comes to AI is harder than it looks. So even if the Magnificent Seven pulls the stock market lower, investors should be careful.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended International Business Machines, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

With value investing back in vogue, I’m taking a leaf out of Warren Buffett’s playbook

With tariffs and trade wars resulting in heightened market volatility, Andrew Mackie takes comfort in Warren Buffett’s words of wisdom.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »