Is DeepSeek about to cause a stock market crash?

The companies known as the Magnificent Seven make up over 20% of the global stock market. And a lot of this is based on their perceived advantage when it comes to artificial intelligence (AI).

The big US tech firms hold all the aces when it comes to cash and computing power. But Deepseek – a Chinese AI lab – seems to be showing this isn’t the advantage investors once thought it was.

What is DeepSeek?

DeepSeek doesn’t have access to the most advanced chips from Nvidia (NASDAQ:NVDA). Despite this, it has built a reasoning model that is outperforming its US counterparts – at a fraction of the cost.

Investors might be wondering about how seriously to take this. But Microsoft (NASDAQ:MSFT) CEO Satya Nadella is treating DeepSeek as the real deal at the World Economic Forum in Davos:

“It’s super impressive how effectively they’ve built a compute-efficient, open-source model. Developments like DeepSeek’s should be taken very seriously.”

Whatever happens with share prices, I think investors should take one thing away from the emergence of DeepSeek. When it comes to AI, competitive advantages just aren’t as robust as they might initially look.

US AI

Microsoft is set to spend $80bn on AI in 2025. Very few other companies are able to do anything like this and that gives the company a huge advantage — at least, at first sight.

Investors should be careful though, in thinking about what that means. While it puts the firm in a strong position against its competitors, DeepSeek’s latest model indicates it’s not insurmountable.

Equally, Nvidia is the leader when it comes to AI chips. But while the threat from a rival catching up might be limited, the risk of demand falling as customers do more with its earlier products also needs considering.

The emergence of DeepSeek has highlighted both of these challenges. And for the biggest US tech stocks trading at high prices, I expect this to have a meaningful impact on share prices sooner or later.

Is this an opportunity?

The biggest question for investors is whether a drop in share prices is a buying opportunity. From my own perspective, I think it’s reason to be careful, but I’m also wary about overreacting.

If there’s one thing I think investors should take from the emergence of DeepSeek, it’s that a competitive advantage in this area is harder to maintain than it might initially seem. And that cuts both ways.

The US hyperscalers might have just seen their lead cut — or even eliminated entirely — by DeepSeek. But I think counting them out when it’s just been shown how hard it is to stay ahead in this industry is very reckless.

I don’t expect them to stay behind for long, but the question is whether they can ever establish a long-term lead. Apparently, big advantages in cash and computing power don’t guarantee this.

Warren Buffett

Warren Buffett has been staying away from AI – and tech in general – following his misjudged investment in IBM. And I think a lot of investors would be wise to consider following his example.

It turns out, assessing who has a durable edge when it comes to AI is harder than it looks. So even if the Magnificent Seven pulls the stock market lower, investors should be careful.

The post Is DeepSeek about to cause a stock market crash? appeared first on The Motley Fool UK.

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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended International Business Machines, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.