The stock market was down Monday, Jan. 27, 2025, with an especially sharp sell-off in the stock of the AI-chip making giant Nvidia (NVDA), which many investors suddenly perceive to be under pressure from the Chinese company DeepSeek. The company claims to have developed a rival to AI chatbots, like OpenAI’s ChatGPT, but at a fraction of the cost. Below are some quick, preliminary thoughts from me and our team on this rapidly developing story.
Early thoughts
It’s hard not to see the growing AI race between the U.S. and China through a geopolitical lens. Many of today’s headlines certainly do. Whether this is a “Sputnik moment” or not remains to be seen. It’s ultimately unknowable, presently, whether China is catching up to, on par with, or ahead of the U.S. in the realm of artificial intelligence. And while U.S. technological hegemony may be important in terms of our national security, especially in the realm of AI, it’s unclear what the investment implications would be of a new leading entrant from China — good, bad, or somewhere in between.
What we do know is this
First, we should be careful not to take anything coming out of China at face value — certainly anything having to do with financial statements or economic data is highly questionable. Claims that DeepSeek has built a more efficient LLM for only $6 million should be taken with a huge grain of salt. It’s possible, even probable, that DeepSeek isn’t properly accounting for prior R&D investment.
Second, whether DeepSeek’s new model (its first release, “R1”) truly outperforms the best models available from U.S. companies (such as OpenAI’s ChatGPT) needs to be pressure-tested by experts. Even if it does, the race isn’t over — in fact, DeepSeek’s technological advancements are likely to be quickly vetted, replicated, and improved upon by U.S. companies. Such is the nature of competition. This is not the end of history.
Third, is that the lesson in today’s sell-off has nothing to do with DeepSeek’s new open-source AI model and everything to do with proper diversification. While Nvidia declined more than 15% on Monday, the S&P 500 was down only 1.3%. Consider that on Monday, both value stocks and bonds were up while small cap and non-U.S. stock losses were relatively mild. Diversification worked. (As an aside, so much for the claims that bonds no longer provide diversification benefits to stock portfolios.)
The big takeaway
Leaders in all industries rise and fall. Rarely does any one company remain an industry leader for long. IBM, General Electric, Sears, Yahoo, Netscape, Intel, Sun Microsystems, WorldCom and so many others have all been surpassed (or permanently relegated to the dustbin of history) by newer, more competitive entrants.
We know from real-world historical data that the average company in the market has significantly underperformed the market by quite a bit. Said differently, most individual companies perform poorly compared to the overall market and the way we obtain better returns is by broad diversification, rather than trying to cherry pick the winners. (The majority of U.S. stocks – 55.2% – underperformed the one-month treasury bill for the 30 year period ending December 2020.)1
Therefore, the real lesson to be gleaned from Monday’s headlines is that investors should diversify beyond the market’s most popular companies — including those that are well-loved like Nvidia — no matter how great their respective investment thesis may sound. Today reminds us, yet again, that diversification can be our friend.
Visit the Mercer Advisors website for past insights from our CIO about major market movements and other interesting topics. Not a Mercer Advisors client but interested in more information? Let’s talk.
1 Bessembinder, Henrik; Te-Feng Chen, Goeun Choi; and Wei, John, K.C., “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks”, Financial Analysts Journal, April 2023.
Home » Insights » Market Commentary » Initial Thoughts on the DeepSeek Selloff: Insights From Our CIO
Initial Thoughts on the DeepSeek Selloff: Insights From Our CIO
Donald Calcagni, MBA, MST, CFP®, AIF®
Chief Investment Officer
Early thoughts on why the DeepSeek selloff has little to do with Nvidia or DeepSeek.
The stock market was down Monday, Jan. 27, 2025, with an especially sharp sell-off in the stock of the AI-chip making giant Nvidia (NVDA), which many investors suddenly perceive to be under pressure from the Chinese company DeepSeek. The company claims to have developed a rival to AI chatbots, like OpenAI’s ChatGPT, but at a fraction of the cost. Below are some quick, preliminary thoughts from me and our team on this rapidly developing story.
Early thoughts
It’s hard not to see the growing AI race between the U.S. and China through a geopolitical lens. Many of today’s headlines certainly do. Whether this is a “Sputnik moment” or not remains to be seen. It’s ultimately unknowable, presently, whether China is catching up to, on par with, or ahead of the U.S. in the realm of artificial intelligence. And while U.S. technological hegemony may be important in terms of our national security, especially in the realm of AI, it’s unclear what the investment implications would be of a new leading entrant from China — good, bad, or somewhere in between.
What we do know is this
First, we should be careful not to take anything coming out of China at face value — certainly anything having to do with financial statements or economic data is highly questionable. Claims that DeepSeek has built a more efficient LLM for only $6 million should be taken with a huge grain of salt. It’s possible, even probable, that DeepSeek isn’t properly accounting for prior R&D investment.
Second, whether DeepSeek’s new model (its first release, “R1”) truly outperforms the best models available from U.S. companies (such as OpenAI’s ChatGPT) needs to be pressure-tested by experts. Even if it does, the race isn’t over — in fact, DeepSeek’s technological advancements are likely to be quickly vetted, replicated, and improved upon by U.S. companies. Such is the nature of competition. This is not the end of history.
Third, is that the lesson in today’s sell-off has nothing to do with DeepSeek’s new open-source AI model and everything to do with proper diversification. While Nvidia declined more than 15% on Monday, the S&P 500 was down only 1.3%. Consider that on Monday, both value stocks and bonds were up while small cap and non-U.S. stock losses were relatively mild. Diversification worked. (As an aside, so much for the claims that bonds no longer provide diversification benefits to stock portfolios.)
The big takeaway
Leaders in all industries rise and fall. Rarely does any one company remain an industry leader for long. IBM, General Electric, Sears, Yahoo, Netscape, Intel, Sun Microsystems, WorldCom and so many others have all been surpassed (or permanently relegated to the dustbin of history) by newer, more competitive entrants.
We know from real-world historical data that the average company in the market has significantly underperformed the market by quite a bit. Said differently, most individual companies perform poorly compared to the overall market and the way we obtain better returns is by broad diversification, rather than trying to cherry pick the winners. (The majority of U.S. stocks – 55.2% – underperformed the one-month treasury bill for the 30 year period ending December 2020.)1
Therefore, the real lesson to be gleaned from Monday’s headlines is that investors should diversify beyond the market’s most popular companies — including those that are well-loved like Nvidia — no matter how great their respective investment thesis may sound. Today reminds us, yet again, that diversification can be our friend.
Visit the Mercer Advisors website for past insights from our CIO about major market movements and other interesting topics. Not a Mercer Advisors client but interested in more information? Let’s talk.
1 Bessembinder, Henrik; Te-Feng Chen, Goeun Choi; and Wei, John, K.C., “Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks”, Financial Analysts Journal, April 2023.
Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.
Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Diversification does not ensure a profit or guarantee against loss. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Explore More
Is Bitcoin an Investable Asset? Not Yet: Insights From Our CIO
Implications of The Market Response To the Election: Insights From Our CIO
Energy Prices on the Eve of the Election: Insights From Our CIO