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Deepseek has barely reached our beaches and it has turned the world stock markets upside down, deeply affecting the Magnificent Seven. This is the group of technology stocks that play a dominant role in the US stock market - limitlessly pushed up by investors excited about breakthroughs in artificial intelligence. Tech royalty, Microsoft, Amazon, Apple, the chipmaker Nvidia, Google’s parent, Alphabet, Facebook’s owner, Meta, and Elon Musk’s Tesla, accounted for half the gains in the S&P 500 share index1. Together, the Magnificent Seven has nearly the same market capitalization of the stock markets in the UK, Canada, and Japan combined2- a revival of the US pictured in “The Golden Age” minus railroad baronets and Mrs. Astor.
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Then, all of a sudden, as in a Chinese classic drama play, Deepseek made its entrance on stage, and their combined share prices are crestfallen. Nvidia, the artificial intelligence giant, lost nearly $600 billion in value, the biggest single-day loss for a public company on record. Even though they later somewhat recovered, it is fair to say that in this play Americans fared worse than in Madame Butterfly…
Everybody tried to explain how cheaper (appallingly so, indeed) and more transparent the new A. I . darling is. It is so convenient for customers that its mere existence - not to mention its stunning success- is embarrassing for the tech moguls. Besides tech issues - and there are plenty of them- one key issue is whether this crack was unavoidable or it was preceded by clear signals that some fragility affected the A.I. financial cycle.
The truth is that before Deepseek the I.A. investment-benefits outline has proven somewhat disappointing - the alarms sounded as early as June 2024 when Analysts at Goldman Sachs published a report: “Gen AI: too much spend, too little benefit?”. In this report, which with hindsight should have been more discussed, “The Wall Street bank asked if a $1tn investment in AI over the next few years will “ever pay off”, while an analysis by Sequoia Capital, an early investor in ChatGPT developer OpenAI, estimated that tech companies will need to earn $600bn to pay back their AI investments”.3”
The reason for the debacle may be partially found in the particular structure of the A.I. investment-benefits cycle - which has given little money to investors in exchange for the huge investment that the Magnificent Seven gets. In his formidable article, Dr. Mihir A. Desai states that “stock prices don’t always rise because the prospects of companies improve. They also rise when investors judge certain companies to be a safer bet than others and don’t penalize them for taking longer to generate returns for their money4”. Certainly, this is the case with the glamorous, cool & super-rich Seven. The future appeared to be safe and bright to them:” Investors see these companies as a safe bet and have thus stopped demanding significant immediate returns”5.
Another question is where The Magnificent gets their money from: according to Dr. Desai, Nvidia gets almost half of its revenue from its siblings in the Magnificent 7. In 2022, Google paid Apple $20 billion to be the default search engine on Safari (20% of Apple profits), Meta employs Amazon Web Services for cloud services and increasingly in its A.I. push. This inbred intermarriage suggests a market concentration that poses risks like overvaluation and vulnerability to economic downturns or unpredictable events - as when Deepseek showed up.
Thus, it seems that Deepseek's terrific performance was a surprise. But the market possibly may have been only waiting for the best when expecting the worst…
Note: This article has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager, or account arrangement, and should not serve altogether as a basis for investment decisions. Prospective investors should consult a legal, tax, or financial professional to determine whether any investment product, strategy, or service is appropriate for them.
- “Why have the big seven tech companies been hit by AI boom doubts?” https://www.theguardian.com/technology/article/2024/aug/03/why-big-seven-tech-companies-hit-ai-boom-doubts-shares
- “A Closer Look at Magnificent Seven Stocks”, by Stephanie Hill, see: https://www.mellon.com/insights/insights-articles/a-closer-look-at-magnificent-seven-stocks.html
- “Gen AI: too much spend, too little benefit?” Allison Nathan, Editor.https://www.goldmansachs.com/insights/top-of-mind/gen-ai-too-much-spend-too-little-benefit
- “ I Study Financial Markets. The Nvidia Rout Is Only the Start”, by Dr. Mihir A. Desai, seehttps://www.nytimes.com/2025/01/28/opinion/nvidia-deepseek-ai-valuation-ouroboros.html
- “ I Study Financial Markets. The Nvidia Rout Is Only the Start”, by Dr. Mihir A. Desai, see https://www.nytimes.com/2025/01/28/opinion/nvidia-deepseek-ai-valuation-ouroboros.html
