Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.
Aunt Betty won’t let competition crowd her space. My aunt brings her famous chicken and dumplings to every family gathering, and it always runs out fast. When asked for the recipe, she just smiles and says, “It’s a secret because I don’t want anyone else to bring it.” In the last few days there have been some tech companies who wish they were as successful as Aunt Betty in protecting their space.
On Monday, January 27, more than a trillion dollars was lost from the U.S. stock market. Tech stocks were among the worst hit after China's DeepSeek released a cheaper Artificial Intelligence (AI) model.
The threat of a new, cheaper and more efficient AI model created a “sell now, ask questions later” attitude among tech investors. This hammered semiconductor stocks and led to scrutiny around the profitability of AI spending in the U.S. after a Chinese AI start-up went toe-to-toe with some of OpenAI's most sophisticated systems.
DeepSeek, the Chinese AI company stirring everything up, launched an accurate AI assistant that costs less than $6 million to train and needs significantly less computing capacity than other AI assistants. This is a fraction of the $100 million to $1 billion that Anthropic recently spent to train its AI assistant.
Makers of AI infrastructure, such as chip maker NVIDIA, the unofficial AI poster child, Oracle, Supermicrocomputer, and TSMC, took huge losses. That pushed several major U.S. stock indexes down on the 27th when the Nasdaq fell 3%, and the S&P 500 declined about 1.5%. Nvidia’s stock lost 17% ($593 billion in value) on January 27 but gained almost 9% back the next day.
This was the first big pullback in AI in the last year or two. It has raised the question of whether the market has overvalued some of these stocks. The market has been surging on much AI hype in the past two years. Analysts are struggling with how to price in AI innovation and how to assign the value AI will bring to companies in profitability, especially if there is a less expensive and more efficient process than the current models have been doing.
We are seeing a reevaluation of how these tech companies, with their unprecedented spending on AI, should be valued. Many people, including me, have been saying for some time that these stocks are overvalued and that we need more time to see how much profit AI will actually produce.
The new Chinese competition has caught the market's attention. The next few earnings reports will be telling. Sometimes, competition has a way of recalibrating a company's focus. One thing is sure: investors will be watching to see if it does for these tech giants.
I called Aunt Betty today to make my last attempt to get the recipe, but she wouldn’t budge. She did say that she might consider leaving me the recipe in her final will. Maybe NVIDIA needs to hire Aunt Betty as a consultant.
Have a blessed week!
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Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.
The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
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