NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Equities Pressured Lower on AI Questions

January 27, 2025
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

Our view is that there is likely to be more scrutiny around AI spending in 2025 and potentially greater volatility as investors adapt to innovation in the space, including the potential for wider adoption and greater efficiencies should the cost to implement come down

Equity markets are under pressure today following the news that DeepSeek, a Chinese Artificial Intelligence (AI) laboratory, released an AI model late last month that replicates the performance of existing AI models but costs much less to build. Specifically, DeepSeek claims its R1 model was trained on approximately 2,000 H800 Nvidia GPUs for a total cost of under $6 million, compared with the training cost for OpenAI’s models of closer to $100 million. In addition, DeepSeek claims to match OpenAI’s o1 performance on various tasks at only 3 to 5% of the cost and are charging just 3% of what OpenAI is charging for their premium service.

The implications of this announcement, in our view, are twofold: one, it has sounded the alarm for investors that the perceived undercapacity of semiconductors for AI application could end up being neutralized much earlier or even shift to overcapacity, and two, that strict semiconductor export restrictions have not proved enough of a deterrent for Chinese companies looking to deliver innovation in this space in a potentially more efficient manner.

Offsetting these concerns is skepticism around the veracity of the news, with some sources arguing that DeepSeek actually has access to an additional 50,000 H100s, which would imply a much higher total cost of the model – possibly over $1 billion in total cost. In addition, even DeepSeek has acknowledged that without access to leading edge chips, they will likely be unable to scale up their model for a large user base. Finally, AI capabilities and the likely application of those capabilities continue to evolve, and as AI advances towards the utilization of advanced reasoning algorithms used in Agentic AI, demand is likely to remain high.

Following last week’s Project Stargate announcement, AI names soared on the excitement around an infusion of $500 billion in spending into the space and evidence of the new administration’s appetite for technology investment. The recent strength in AI semiconductors and other AI adjacent names in areas such as power generation is likely helping to drive some of the selling today; combining fears of a potential slowdown in overall spend coupled with already lofty valuations and decelerating earnings growth only compounds that headwind.

Our view is that there is likely to be more scrutiny around AI spending as we move ahead in 2025 as investors seek to understand how the massive investment being made will be monetized; in fact, this announcement may have pulled that demand for greater clarity forward. There may also be additional bouts of volatility as investors digest and adapt to this quickly changing force of innovation, which includes the potential for wider usage/adoption and greater efficiencies should the cost to implement come down. Our commitment to active investing and deep portfolio management and research capabilities should allow us to take advantage of these changes.

With that said, paramount for us is balancing the opportunities and risks of investing in this innovative space. The concentration in the U.S. equity market and in portfolios as a result of sharp gains over the past two years is brought to the fore during pullbacks such as the one we are seeing today.

Our guidance is to continue to rebalance and reallocate back to longer-term strategic targets, and specifically in terms of concentrated individual positions, execute on a prescriptive plan to bring those concentrations lower to better insulate the portfolio from exogenous and/or non-fundamental drivers of performance. Through a combination of creative strategies and a systematic approach, our team can create a solution to mitigate risk while also allowing for participation in what is likely to be a longer-term growth driver in our global economy. We encourage you to reach out to discuss in more detail how we can help.

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