Stocks Down Sharply After Chinese AI Company DeepSeek Causes Concern For U.S. AI Stocks were down sharply yesterday after concerns that Chinese AI company DeepSeek could become a potential challenger to OpenAI. The tech-heavy Nasdaq, and S&P 500 for that matter, were hit the hardest giving up -3.07% and -1.46% respectively. Reports over the weekend that DeepSeek (which came virtually out of nowhere) has developed an open-source, large language model that could rival ChatGPT. The shocker wasn't the new competition, but that the program was supposedly developed for a fraction of the cost (millions) vs. the billions invested into OpenAI to launch their GPT program. There are plenty of questions as to what this means. Many have said it's just as good. Maybe better. But there's lots of skepticism surrounding DeepSeek and it's true capabilities. But with DeepSeek being a Chinese company, it appears the responses are/can be censored. What info might be made available to the Chinese government? Will U.S. companies feel comfortable using the Chinese technology for their AI projects? (The debate over TikTok's social media platform stirred vigorous debate. Isn't AI an even more sensitive subject?) This will all be hashed out in the days, weeks and more to come. But for now, it had a chilling effect on the U.S. AI stocks. Although, my first impression is that I believe the concerns over what it means for U.S. AI are overblown. As for the market's reaction, we were due for a pullback/correction. And it usually coincides with a catalyst or story. We got that excuse over the weekend, and the subsequent pullback. How long it lasts is the question on everyone's mind. In other news, yesterday's Chicago Fed National Activity Index rose to 0.15 vs. last month's -0.01. The 3-month moving average improved as well coming in at -0.13 vs. last month's -0.26. New Home Sales increased to 698,000 units (annualized) vs. last month's 674K and views for 672K. And the Dallas Fed Manufacturing Index showed the General Activity Index jump to 14.1 from last month's 4.5, while the Production Index increased to 12.2 from 5.3. Today we'll get the Durable Goods Orders report, the Case-Shiller Home Price Index, the Richmond Fed Manufacturing Index, and Consumer Confidence. The Fed's 2-day FOMC meeting begins today as well, which means tomorrow (at 2:00 PM ET), we'll hear what the Fed has decided on rates (there's a 96.8% probability that they DON'T cut on Wednesday). But everybody will be listening for any clues as to what they might do in March (they don't meet in February), and beyond. We'll also get more earnings with 65 companies on deck to report today. But tomorrow we'll get earnings from 3 of the Magnificent 7 with Microsoft, Meta and Tesla reporting after the close. (Apple, another one of the Mag 7 stocks, reports on Thursday.) Even though it was an ugly day yesterday (although, not for the Dow, which was actually up 0.65%), all of the indexes ended a good deal off their lows of the day, with others closing near their best levels of the day. There could very well be some more volatility, especially in tech, following the DeepSeek news. But it will be interesting to hear if/how these companies mention DeepSeek in their earnings reports, and in their earnings calls. Even if they don't have any prepared comments, you can be sure they will be asked about it. It should be a busy week this week to say the least. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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