One Of Those Days
Days like today... In the shoes of frightened tech investors... 'Overreaction Monday'... A wake-up call... The executive orders just keep on coming... The real currency story...
Every so often, days like today happen...
Out of seemingly nowhere, the market will get spooked by a piece of "surprise" news.
The tech-heavy Nasdaq Composite Index sank almost 3% today, and the U.S. benchmark S&P 500 Index closed about 1.3% lower. Many individual artificial-intelligence ("AI")-related names like Nvidia (NVDA) and Broadcom (AVGO) were down by much more.
The catalyst?
News broke that Chinese AI startup DeepSeek has reportedly developed a free, open-source large-language model that's much cheaper and more energy efficient than a similar version created by U.S.-based OpenAI.
DeepSeek released "R1" last Monday and published a paper with details on how it was developed last Wednesday. But it didn't catch investors' attention until Friday when noted venture capitalist Marc Andreessen (who once famously wrote "software is eating the world"), posted on social media platform X...
Deepseek R1 is one of the most amazing and impressive breakthroughs I've ever seen – and as open source, a profound gift to the world.
That might be true eventually, but enough people in the market took the news as an excuse to sell first and ask questions later.
Mr. Market doesn't like unannounced change. And if true, a cheaper way to "do AI" – by a Chinese company no less – upsets the status-quo narrative of the U.S. AI boom.
In the shoes of frightened tech investors...
Jittery investors are questioning whether U.S. companies like OpenAI are still leaders in this emerging sector, along with the U.S. AI infrastructure boom in general.
As our colleague and Stansberry's Investment Advisory lead editor Whitney Tilson wrote today in his free daily newsletter today...
Given how much of the gains in tech stocks over the past year have been driven by investor enthusiasm for AI, it's not surprising that the sector would take a hit on news of a new, foreign, and low-cost competitive threat.
All of this could mean that American companies are overspending by tens of billions of dollars or more on AI... or being terribly inefficient... or won't spend as much on AI in the future... or that AI infrastructure won't need as much energy...
If you're a seasoned investor, these might sound like good things in the long run (more on this in a moment). But, for a set of richly valued (and/or bubbly) AI-related companies, it wasn't great news for their stock prices.
On the other hand...
We're talking about competition from a Chinese startup here – one that I (Corey McLaughlin) hadn't heard of until last night, with analysis and buzz stemming from a research paper with nearly 200 authors.
I've also heard from several of my Stansberry Research colleagues and other reputable sources who say that today's market's reaction may be overblown.
Geopolitical fear is involved too. Perhaps the most notable part of DeepSeek's claims is that it accomplished its results despite "export controls" that the U.S. has put on chipmakers like Nvidia so they don't send their best stuff to China. DeepSeek says it used older Nvidia chips.
Mind you, although the company says it used older Nvidia chips, it also reportedly has access to higher-end chips – despite the export ban put on these chips by the Joe Biden administration a few years ago. So there are a lot of unanswered questions here. If you're interested in reading DeepSeek's paper with its claims, you can find it here.
Even if everything is true...
I find it difficult to think that U.S. companies are going to flock to using Chinese-based AI models anytime soon, or ever. And they're not going to stop buying chips from Nvidia or U.S. friendly firms either. Plus, this may make Nvidia chips even more in demand. That's what the company itself said today.
In a rare mid-day statement, Nvidia said "DeepSeek is an excellent AI advancement" based on an "inference" concept that "requires significant numbers of Nvidia GPUs [chips] and high-performance networking."
Even after reports about DeepSeek's new AI hit a larger audience last week, Meta Platforms (META) announced it was planning to increase its capital expenditure spending on AI to $65 billion in 2025, up from $40 billion for 2024.
Whitney also wrote in his newsletter today...
In light of what DeepSeek has now shown is possible, in the not-too-distant future Meta might be able to achieve its AI goals for, say, half of what it's planning to spend... which would drop more than $30 billion of pretax profits to its bottom line!
If anything, competition from afar might make dedicated, forward-thinking U.S. firms stronger and "lift all boats" in the long run. That's what Microsoft (MSFT) CEO Satya Nadella believes...
Now, there might be some spin in that. The truth lies somewhere in between. But the big selloffs we saw in tech stocks today could be decent buying opportunities if you're a believer in the long-term future of AI.
In short, it was an 'overreaction Monday'...
In American football, there's a concept called "overreaction Monday."
It's when fans and the media get riled up positively or negatively about what happened in Sunday's game. The opinions are often extreme: "Our team is going to win the Super Bowl!" or "Our team stinks!"
That's sort of what the U.S. stock market looked like today.
Some investors were caught off guard by the reality that there's a different way to "do AI." And yes, the Nasdaq was down, and the semiconductor sector was down even more, as Nvidia fell 17% – and traded below its 200-day moving average. Energy stocks that have participated in the AI boom lately also saw a haircut in their prices. A handful of these "AI energy plays" were down 20% or more.
But any headlines you may have read about the "market" dramatically selling off weren't true. The broad market performance wasn't all that bad. The equally weighted S&P 500, for example, was up slightly. Roughly two-thirds of the S&P 500 stocks moved higher.
So, sure, let today be a wake-up call...
U.S. companies do have competition when it comes to AI breakthroughs and scaling the technology, most notably from China.
The good times also don't last forever or happen every single day without interruption. So always remember the risk-reward proposition of "putting all your eggs in one basket," like with AI-related stocks.
Life goes on...
Tomorrow, another two-day Federal Reserve policy meeting begins...
On Wednesday, we'll hear from Fed Chair Jerome Powell to try to explain whatever the central bank decides to do. Futures traders strongly expect a "pause" in rate cuts, and we'd be surprised by anything different. But signals that the Fed is still on board with the idea of cuts could be well-received and juice the market.
Meanwhile, some of the "Magnificent Seven" will report their quarterly earnings this week. Meta Platforms, Microsoft, and Tesla (TSLA) expected to report after Wednesday's close.
The Magnificent Seven are expected to deliver double-digit earnings growth for the fourth quarter of 2024. If they meet or beat those expectations, on balance, they could give the market a lift. Conversely, though, sour sentiment could lead to more of what we saw today.
And surely, the subject of Chinese AI competition will come up (be it challenges or opportunities) on their earnings calls with Wall Street analysts.
Finally, the executive orders just keep on coming...
Last Thursday, President Donald Trump delivered one for the cryptocurrency bulls... by signing an executive order titled "Strengthening American Leadership in Digital Financial Technology." That's a roundabout way of saying this order is to make good on Trump's promise that the U.S. will become the "crypto capital of the planet."
The order calls for a new group – made up of the Treasury secretary, chairman of the U.S. Securities and Exchange Commission, commerce secretary, and chairman of the Commodity Futures Trading Commission, among others – to focus on recommending regulatory and legislative changes to digital asset markets within 180 days. According to the order, these proposals should focus on "market structure, oversight, consumer protection, and risk management."
It also effectively bans the creation of a Central Bank Digital Currency ("CBDC"). The potential for a U.S. CBDC, or "digital dollar," had some folks concerned over privacy or access to their money. The U.S. hasn't done anything with CBDCs outside of a few Fed studies.
Now, it looks like the "study" phase is as far as a U.S. CBDC will get.
Where the 'most pro-crypto president' fell short...
Trump's crypto order didn't include what some investors have been hoping for – a strategic bitcoin reserve. As our colleague and Crypto Capital analyst Andrew McGuirk wrote in the January 19 Digest, this would essentially be "a sovereign wealth fund for digital assets."
We didn't quite see a push for that... However, while there's no directive from Trump for the government to go out and buy and sell cryptos, the order proposes a "digital asset stockpile."
There's already something similar in place.
However, the government has confiscated crypto through law enforcement and sanctions. According to Forbes, the U.S. government already has about 200,000 bitcoin. So creating a formal stockpile of bitcoin and other cryptos wouldn't be out of the realm of possibility.
And it could be on the way soon...
Also last Thursday, the Senate Banking Committee established a panel on digital assets with Senator Cynthia Lummis (R-WY) as the chair.
Like Trump, Senator Lummis is pro-crypto. According to crypto news service CoinDesk, she has owned bitcoin since 2013. And she's spoken at bitcoin conferences. Now, she's leading the charge on crypto legislation...
Back in July, she introduced a bill to establish a strategic bitcoin reserve aimed at acquiring 5% of all bitcoin supply (about 1 million bitcoin). At today's price of about $101,000 (even with a roughly 3% dip in the past 24 hours), that would come out to around $101 billion worth of bitcoin.
At a minimum, it will take months to see what this regulatory framework ends up looking like. And if it includes a strategic bitcoin reserve, it's likely those purchases won't come all at once.
Still, investors are taking note. Bitcoin is hovering around its all-time high, and up more than 40% since Election Day. A clearer regulatory picture would go a long way towards bringing more money into the space. As Andrew wrote...
Whether we see a clear regulatory framework, [exchange-traded funds], staking products, or even national reserves, the crypto industry is poised to capitalize on this political shift.
Crypto investors need to pay attention. Crypto Capital and Stansberry Innovations Report editor Eric Wade says this could be what sets off the next big move in bitcoin and cryptos.
That's part of the reason why Eric recently traveled to Texas…
He wanted to learn about one exciting crypto story firsthand. This is the "real currency story," Eric says, that will define Trump's second term in the White House. As he says...
It has nothing to do with gold, oil, or any of the new BRICS currencies, but it could escalate dramatically in the very near future, with a single announcement from state authorities that'll send shockwaves through the financial system.
Your savings, your retirement plans, every dollar you have in the bank... This currency shock could have a dramatic impact on it all.
Eric predicts it will make a handful of people incredibly wealthy. (He says he has personally already made $100,000 while researching this story.) The problem is, almost no one in the media has connected the dots about what's really going on here.
You can get the full story here.
New 52-week highs (as of 1/24/25): Abbott Laboratories (ABT), Agnico Eagle Mines (AEM), Alpha Architect 1-3 Month Box Fund (BOXX), Constellation Energy (CEG), CyberArk Software (CYBR), Dick's Sporting Goods (DKS), Fanuc (FANUY), Alphabet (GOOGL), HealthEquity (HQY), Kellanova (K), Meta Platforms (META), Markel (MKL), Spotify Technology (SPOT), Twilio (TWLO), Visa (V), and Westlake Chemical Partners (WLKP).
In today's mailbag, a note about Argentinian President Javier Milei, who we wrote about last week after he delivered a speech at the World Economic Forum for the second-straight year... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Hello Corey. [Is Milei] weird? Genius? Snake oil vendor? How to decipher Milei [is] a conundrum. I can't." – Subscriber José from Argentina
All the best,
Corey McLaughlin and Nick Koziol
Baltimore, Maryland
January 27, 2025