U.S. stocks have not yet completely reflected the effects of the Chinese business DeepSeek, which promises to provide more affordable and energy-efficient solutions for utilizing artificial intelligence.
Don Townswick, director of equities strategies at Conning Asset Management, which manages assets worth $170 billion, thinks so.
“If it turns out to be a little more sketchy, a little less valid than what people are saying now, the ‘Magnificent Seven’ stocks would tend to benefit,” Townswick stated to MarketWatch.
He said, “I think it’s going to be a lot easier for typical companies to more easily use AI in their business,” if DeepSeek proves to be a less expensive solution.
Through increased productivity and efficiency from less costly AI solutions, Townswick sees benefits from DeepSeek that might be accretive to profitability for a wider range of businesses beyond the current AI heavyweights.
The competition to spend on AI
The U.S. launch of DeepSeek’s chatbot earlier this month stunned Wall Street and caused the stock of AI chip maker Nvidia Corp. (NVDA) to plummet by an unprecedented $600 billion in a single day.
It also scrutinized the enormous sums of money that American megacap tech corporations were pledging for AI infrastructure. Instead, the U.S. expenditure race has gotten more intense.
After committing $60 billion to $65 billion this year, Mark Zuckerberg, the CEO of Meta Platform Inc. (META), spoke a week ago about investing “hundreds of billions of dollars” on AI infrastructure over the next several years.
Wall Street was not prepared for the $75 billion in capital expenditures that Alphabet Inc. (GOOG) (GOOGL) predicted this week. Microsoft Inc. (MSFT) reported that its expenditures on cloud and AI increased by 95% to $22.6 billion during the second quarter of its fiscal year.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, stated, “The market is asking itself, ‘Geez, how much more has to be done before we see capital expenditures reduced, instead of increasing by tremendous amounts?'” when it comes to spending on anything AI.
“When is enough, enough?” “What?” asked Pavlik.
While a decline in the shares of Tesla Inc. (TSLA), Apple Inc. (AAPL), and Amazon.com Inc. (AMZN) may indicate worries about President Donald Trump’s trade war, new AI-spending commitments helped boost Nvidia’s stock on Wednesday.
The United States imposed new 10% tariffs on China this week, while Trump threatened but postponed 25% penalties on Canada and Mexico by one month.
Recognizing the ‘Mag Seven’
Even though AI stocks are currently under a lot of scrutiny, investors are once again paying attention to other parts of the market.
Garrett Melson, portfolio strategist at Natixis Investment Managers, stated, “There has been a bit of a rotation,” pointing out that defensive and rate-sensitive segments of the market have been rising while tech has been under pressure.
“That’s been the name of the game this year.”
See: Alphabet predicts a sharp decline as Big Tech companies struggle on quarterly earnings
Townswick at Conning still believes that caution is warranted. For starters, the “Magnificent Seven” earnings growth rate has been slowing down in recent quarters, particularly after the group’s fourth-quarter 2023 earnings growth rate of 61% annually.
Townswick stated, “That was a high-water mark,” and that going ahead, the rate is anticipated to be closer to 16% to 18% by the end of this year. “That’s still pretty good growth,” he stated.
The lofty values of the “Magnificent Seven” might become more difficult to defend, though, as the group would also approach the roughly 12% to 13% annual growth rate anticipated for the remaining companies in the S&P 500 index.
Melson at Natixis continues to believe that recent dip-buying is a good indication for markets.
“The most surprising part of the past couple of weeks, given the news around DeepSeek and shocks on the trade front, is the fact that stocks were still close to their all-time highs,” Melson stated. “There is still a pretty resilient market here.”
