How Chinese Startup DeepSeek Rocked the AI Industry—And What It Means for Wespath’s Investors

   By Johara Farhadieh
  Chief Investment Officer

   By Joe Halwax, CAIA, CIMA
   Senior Managing Director, Institutional Investment Services

February 3, 2025

Note: This commentary was written prior to the Trump administration's announcement of new tariffs against Canada, Mexico and China, which have underscored the themes of global competition and geopolitical uncertainty we identify below. We are monitoring the latest tariff headlines; keep an eye out for additional content and resources as the stories evolve.

Last week, U.S. technology companies were rattled by something all-too-familiar—a dramatically cheaper Chinese alternative to something they’d previously cornered the market in. This time, the buzz centered on artificial intelligence (AI), namely a new generative AI tool developed by China-based company DeepSeek that rivals those like OpenAI’s popular ChatGPT.

DeepSeek recently released a new open-source AI model called “R1,” which it claims outperformed leading competitors’ models and was built for a fraction of the cost. The company’s platform relies on what the tech industry calls “inference time computing.” For non-AI experts, that means the technology only looks at data in the most-relevant parts of the model for each query, rather than searching within an entire enormous dataset. By looking at sharply less data to produce similar or better results, DeepSeek is potentially much more efficient than U.S.-developed tools like ChatGPT.

What Does This Mean for U.S. Stocks?

The news was all the rage on Wall Street, with some U.S. technology stocks moving sharply lower on fears they may begin to lose market share. Nvidia stock, for example, dropped 17% and erased nearly $600 billion in market value on Monday, January 27. The tech-heavy Nasdaq Index fell about 3% that day.

Nvidia has been one of the best-performing stocks in the S&P 500, up about 94% in the past 12 months and 1900% over the past five years. More broadly, U.S. large-cap technology stocks—including Nvidia’s “Magnificent 7” peers like Microsoft and Alphabet—have been the biggest winners of the AI investing craze. So far, those companies have backed up the AI hype with legitimately strong earnings, revenue and free cash flow, as we highlighted last year.

A new concern is that cheaper, more efficient alternatives like DeepSeek highlight the likelihood of more emerging competitors. DeepSeek trained its model on Nvidia chips, but not its top-of-the line, highest-priced models. Also, DeepSeek’s open-source approach means others can learn from and build on its advancements, mostly contrasting the U.S. developers who have kept their programming close to the vest.

The possibility of widespread AI efficiency improvements even sent U.S. electric power stocks plunging on Monday. Some investors have been bullish on power companies based on the demand for electricity driven by datacenters and AI computing; hypothetically, widespread efficiency gains would mean lower-than-anticipated electricity demand.

Finally, the fact that a Chinese company has staked its claim among the AI leaders may add more fuel to future trade negotiations. Microsoft, OpenAI’s largest investor, is reportedly already investigating whether DeepSeek trained its model using OpenAI data obtained in an unauthorized manner. Bloomberg said on Wednesday that the Trump administration is considering tightening restrictions on sales of Nvidia chips to China. The first Trump administration frequently cited U.S. technology intellectual property as a bargaining tool in tariff talks with China.

What Does This Mean for Wespath’s Investors?

In the very short-term, the DeepSeek news did have some impact on the Wespath funds. Amid Nvidia’s selloff on January 27, the U.S. Equity Fund – P Series (for participants and plan sponsors) and the U.S. Equity Fund – I Series (for institutional investors) outperformed their benchmarks, the Russell 3000 Index, by 0.51% and 0.46%, respectively. Both funds declined on the day due to the broader market retreat, but less so than the benchmark index which is more heavily weighted to mega-cap tech companies like Nvidia.

But if you know Wespath, you know it’s not like us to focus too greatly on short-term performance—let alone returns from one trading day.

That doesn’t mean, however, that we aren’t paying attention to how the DeepSeek news connects to other important market trends that can impact our funds over the long-term. We already mentioned the potential for this storyline to influence trade negotiations. Whether or not all of DeepSeek’s claims are true, and regardless of whether competitors are able to dent Nvidia’s bottom line any time soon, it is clear that the Chinese company was able to make impressive progress despite current trade restrictions. That could be a lesson learned on how restrictions can have unintended consequences.

And though Nvidia stock may have plunged on the DeepSeek news, consider what the comparatively minor dip in broader markets may have signaled: that while cheaper AI may hurt existing leaders, it could also lead to more rapid and widespread deployment of AI overall.

This would be particularly impactful at the application layer—the products and services everyday people are expected to use. For example, your mobile phone needs a powerful chip and fast processing speeds to be your ChatGPT-like personal assistant. This will happen faster as the cost to deliver shrinks. There are no shortage of risks and uncertainties associated with the deployment of AI, but we’re still generally optimistic about its potential to improve the things regular people use daily.

Shrinking development costs also increase competition and help diversify the winners from just the mega-cap tech companies. Investors have wondered for the past couple years about opportunities for the “Other 493”—or the non-Magnificent 7 members of the S&P 500—to shine. If a small, little-known startup can jump to the top of the AI leaderboards, surely others can, too.

DeepSeek also highlights that these winners may not come from the U.S. Indeed, the story sends out an interesting warning about “home country bias.” U.S. stocks have dominated their international counterparts for several years. Global technological innovation still largely resides in Silicon Valley. But investors can’t take the market’s so-called “American exceptionalism” theme for granted. Just a few days after the DeepSeek headlines broke, Alibaba, a much larger Chinese technology company, released its own AI model that it claimed surpasses DeepSeek.

We can be confident that other companies all around the world are working on their own solutions. We may not know the outright winners for decades. Until then, global AI competition is ultimately a reminder on the potential benefits of a globally diversified approach and a long-term mindset. We remain committed to living into that on behalf of Wespath’s investors.