By Garry White, Chief Investment Commentator at wealth manager Charles Stanley
The news is not a positive for the US-China hawks in Washington, who want to ensure that it is the US that develops and takes charge of the infrastructure of tomorrow. This has been one of the main aims in the US-China trade war with Beijing and the use of sanctions to halt intellectual property theft and technology transfer to its rivals. However, the competition generated by such ideological conflicts will act as a motivator that can increase the pace of technological development significantly.
Just like the rivalry between Washington and Moscow sparked the technological race that took man to the moon in the late 1960s, the fact that China is still in the AI race will be a great motivator for the brains of Silicon Valley. So, it’s likely that the development will result in more innovation, not less. This ‘disruptive innovation’ often creates a new product or service that's more accessible, affordable, and simpler than existing options. So, this is a good development for future consumers.
It also shows that innovation doesn’t only come from having deep pockets. You can’t just throw huge amounts of money at something to guarantee coming out on top – an excellent lesson for the bankers of Wall Street. Technology companies have channelled countless billions into the AI space with no guarantee of the level of future profits – or when they will materialise. Deploying investment capital more sensibly will be good for some of these companies investing heavily in the sector – and particularly for their shareholders over the longer term.
Clearly, investors in technology companies are sitting on potentially painful short-term losses and some of these will be significant. Nvidia, for example, recorded the largest-ever one-day valuation loss of any company in US industry.
However, sector investors were almost certainly sitting on significant gains as we entered 2025 – and they are likely to understand (or should have understood) that the chance of a correction was high at some point. The risks have been skewed to the downside in the sector for quite some time.
The good news for investors is that the falls last week were probably healthy, as it was a valuation issue not an existential crisis. The falls reflected a sector that traded on elevated valuations being confronted by the force of disruption innovation. It was not a fundamental reassessment of prospects for the AI industry. They remain as sound and exciting as they were the week before most people had heard the name DeepSeek.
Alphabet and Amazon will release earnings this week and will ultimately face questions on the DeepSeek developments. They are likely to join Meta chief executive Mark Zuckerberg in the defence of the investment in AI at its upbeat earnings statement last week. Mr Zuckerberg even appeared to double down, indicating the company would spend “hundreds of billions more”. We will have to wait until 26 February to see if any of this development changes its management’s view of Nvidia’s prospects and outlook. It probably hasn’t changed much here either.
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