In my modest opinion the DeepSeek surprise/shock is – counterintuitively – over time bullish for US and global stocks as it is another positive global aggregate supply shock that increases US/global potential growth and makes exponential AI even more exponential!
So the short term market reaction is excessive, even for capex-heavy Mag-7. Hyperscalers in the US will benefit from this innovation – that is open source – as they can adopt it and develop LLM and other models with less GPU compute power. Even NVDIA will benefit over time as this positive supply shock will increase massively demand for AI compute and applications of all sorts as potential growth is even higher globally.
Also DeepSeek likely lied and cheated on its R&D expenses and advanced chips use. They likely got a significant amount of NVDIA advanced chips in spite of the UD sanctions: thus, their actual GPU was 100k+ more than the announced 5k. So the DeepSeek innovation is not a 20x cost reduction; most likely only a 2-3x. Significant but not a 95% cost efficiency gain.
This is also another salvo in the US-China rivalry on AI. China used cleverly this DeepSeek scoop to project its soft power in AI at time of peak US dominance of the field. But over time for many reasons the US dominance of AI relative to China remains unaffected by this surprise.
Also for now, the stock market correction that occurred yesterday Monday following the Chinese DeepSeek AI surprise is not large enough to affect the Fed/FOMC decision tomorrow: while the stock market fall has tightened financial conditions, such financial conditions have also eased given the fall in short and long rates and a small weakening of the dollar. And the small rebound of equities today is a sign that markets overreacted yesterday.
Also, since the DeepSeek surprise is a positive aggregate supply shock that over the medium term increases US and global potential growth, over time – unless the stock market fall unlikely continues sharply – it will not impact Fed decisions in a dovish direction even over time. If anything an increase in potential growth increases the equilibrium real r*.
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