Market Commentary: January 27, 2025

US Tech Stocks Drop as Chinese Startup DeepSeek Unveils Low-Cost AI Model

This morning the equity markets are opening with a thud. The main culprit is centered around a report that a Chinese start-up company called DeepSeek has launched a free, open-sourced AI model which was said to be developed within a two-month timeframe at an estimated cost of $ 6 million. The US technology companies shares have reacted adversely to this news as it appears to bring into question the need for the multi-billion capital expense budgets being directed at the AI sector by the tech giants within the “Magnificent Seven”. Speaking of the “Magnificent Seven”, members including Meta, Microsoft, Telsa and Apple are all reporting their quarterly earnings this week.

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DeepSeek AI Raises Valuation Concerns for US Tech Giants, But Some See Buying Opportunity

Clearly the news on DeepSeek is bringing into question the current valuation levels of the large US tech stocks which have risen sharply based on their perceived AI prowess. While the DeepSeek model appears to be credible and has reportedly outperformed Open AI in several tests, pundits question the company’s claims on their start-up costs as being wildly understated. Other investors appear to see the current US tech company price drops as a rare buying opportunity for the tech sector.

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S&P 500 and NASDAQ Slide Amid AI Concerns, Apple Gains Despite Recent AI Lag

The S&P 500 Index is trading at 6000 (-1.65%), while the tech-heavy NASDAQ Index is at 19400 which is down -2.79%. The main market indices have already risen sharply from their pre-market lows. Interestingly, the only tech company which is in the green today is Apple (+1.33%). Recall Apple has underperformed during the recent AI runup because the analysts perceived the company was behind on AI technology.

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AI Market Shock Hits Stocks, but US Treasuries Rally on Flight to Safety

While this morning’s AI market shock, has impacted stocks across the board, it is refreshing to see that US Treasuries are rallying based on their “flight to quality” bid. For example, the 10- Year Treasury prices have rallied with its yield falling to 4.54%, while the 2-Year yield has fallen to 4.20%. This puts the 2s-10s yield spread at 34 bps which is 4 bps steeper than last week’s levels.

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