China`s DeepSeek low-cost model rattles AI equities

General market commentary

US equities closed lower on Monday, with both the S&P 500 and Nasdaq facing significant losses, primarily driven by a sharp sell-off in semiconductor shares, notably Nvidia. The chipmaker’s market value plummeted by nearly $600 billion, as concerns mounted over the release of a low-cost artificial intelligence model from Chinese startup DeepSeek. DeepSeek’s model reportedly uses cheaper chips and less data, which has raised fears that it could challenge the dominance of US-based AI leaders like Nvidia, which rely on higher-end, more expensive hardware. This led to a broad-based decline in semiconductor shares. The Nasdaq fell by 3%, the S&P 500 dropped 1.5%, while the Dow gained around 0.6%, supported by a rise in large-cap value shares, suggesting a shift towards more stable, less volatile equities in uncertain market conditions.

Despite the immediate market turbulence, US technology companies are likely to remain leaders in the global AI race, bolstered by strong balance sheets, transparency, and stricter regulatory frameworks that make them more attractive to investors compared to their international counterparts. While competition from Chinese companies like DeepSeek may prompt greater efficiency and innovation, the US tech giants are well-positioned to respond. In fact, with the sector’s competitiveness and rapid evolution, it’s expected that companies like Microsoft and Meta, both of which are reporting earnings on Wednesday, will likely adjust their strategies in response to this new threat. Additionally, the market’s cautious mood has led to a flight to safer assets, with Treasury bonds drawing more demand and pushing down the 10-year Treasury yield to 4.52%. This shift has also caused the VIX volatility index to spike, signalling increased investor apprehension.

Latest market and economic update

Asian markets were largely flat on Tuesday, with Japan's Nikkei 225 leading losses, driven by concerns over a Chinese AI model that impacted chipmakers. Hong Kong's Hang Seng rose slightly, while Australian equities were muted ahead of key inflation data, and India's Nifty 50 showed signs of recovery.

U.S. equity futures are likely to open flat, with attention on upcoming earnings reports and the Federal Reserve's two-day policy meeting. Investors will also focus on key inflation data later this week, while concerns over competition from Chinese AI startup DeepSeek continue to weigh on AI-related shares.

European equity indices closed lower on Monday, with the STOXX 50 dropping 0.6% and the STOXX 600 closing flat. Tech shares like ASML, ASMI, and Infineon suffered heavy losses, while LVMH, banks, and consumer defensive equities performed well, with LVMH gaining 3%.

The US dollar index rose above 107.8 on Tuesday, rebounding from six-week lows, with the dollar gaining significantly against the euro, which was trading at 1.0435. This strength came amid President Trump's tariff threats and growing caution among traders ahead of the February 1 tariff deadline.

Oil prices stabilised in Asian trade on Tuesday after a steep decline last week, weighed down by concerns over increased US supply under President Trump and weaker long-term demand due to soft economic data from China. Trump’s push to ramp up US production, along with fears over reduced energy demand linked to more efficient AI models like DeepSeek, also added pressure on the market.

NATO Secretary General Mark Rutte urged alliance members to raise defence spending beyond the 2% GDP target, citing evolving challenges and insufficient current levels. He also accused Russia of destabilising NATO states through cyberattacks, sabotage, and aggression against Ukraine.

Equities on the move

The following companies experienced moves in their share price driven by analyst ratings, quarterly earnings, or other news:

Nvidia acknowledged that DeepSeek's rise highlights ongoing demand for its chips, particularly for inference, while Donald Trump praised the model as a wake-up call for Silicon Valley to adopt more efficient practices. Sam Altman recognised DeepSeek's cost efficiency but stressed that OpenAI remains focused on developing better models, with more computing power being essential for future AI research.

Shares of U.S. power, utility, and natural gas companies saw significant drops after DeepSeek’s AI model raised concerns about lower electricity demand for data centres, which had been expected to drive future growth. Despite the sell-off, some experts warned that the long-term impact on power demand may be overstated, as broader AI adoption could still result in higher energy consumption overall.

AT&T surpassed expectations in Q4 with strong wireless and fiber subscriber growth, driven by bundled 5G and fiber plans, boosting shares by over 7%. The company reported higher-than-expected profits and aims to expand fiber coverage to over 50 million locations by 2029.

Ryanair reported stronger-than-expected Q3 profits of €149 million and expressed cautious optimism about summer fares, despite cutting passenger forecasts due to Boeing delivery delays. The airline expects 206 million passengers by March 2026, with Boeing’s production issues impacting aircraft availability.

Mercedes-Benz expects its passenger car division's adjusted margin for Q4 2024 to surpass its 6%-7% forecast and is confident of meeting its full-year margin target of 7.5%-8.5%. Despite a 3% drop in core car sales for 2024, the company saw a 1% increase in Q4, with top-end vehicle sales helping offset challenges in the Chinese market

Estee Lauder is reviewing its portfolio of beauty brands, which could lead to the sale of some labels as part of efforts to turn around under new leadership. The company has faced declining demand, particularly in China, and saw a significant drop in its shares over the past three years.

Google will update its Maps platform to rename the Gulf of Mexico as the "Gulf of America" in line with a directive from the U.S. government under Trump's "America First" policy. The change has sparked mixed reactions, with some supporting it as a reflection of updated geographic standards and others questioning its necessity.

Needham & Company raised Alphabet’s price target to $225, citing strong growth driven by Google Cloud, which is expected to nearly double its operating income in Q4 2024. The firm forecasts 12% year-over-year revenue growth for 2025 and 2026, with EPS rising to $10.27 by 2026.

TD Cowen analysts raised their price target for American Airlines from $25 to $30, maintaining a "Buy" rating due to improved corporate sales recovery, strong travel trends, and progress in reducing debt. The airline's renegotiated credit card partnership and strategic fleet expansion are expected to drive significant long-term profits, with further margin expansion anticipated through efficient execution and deleveraging.

Goldman Sachs upgraded Twilio to “Buy” with a price target of $185, citing improved growth prospects, strong free cash flow, and efficiency measures driving a turnaround. Twilio’s enhanced Communications portfolio and AI-driven products position it to accelerate revenue growth and expand its market leadership.

Morgan Stanley upgraded LVMH to "Overweight," citing improved prospects driven by strong US demand, encouraging trends in China, and growth in key brands like Vuitton and Bulgari. Despite risks such as tariffs and potential Q1 sales softness, the firm set a €820 price target, reflecting a 14% upside.

BCA Research upgraded European equities to "neutral," citing improved fundamentals, attractive valuations, and easing financial pressures supported by falling natural gas prices and China's stabilisation. While risks like the Ukraine conflict persist, regulatory shifts and stronger trade links with China bolster Europe's growth outlook.

Upcoming data and events

Today, the US will release key economic data, including Durable Goods Orders and Consumer Confidence, alongside earnings reports from notable companies such as Starbucks, Chubb, Boeing, General Motors, and Lockheed Martin. In Europe, LVMH and SAP are also set to report their earnings.

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