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The End of the Bull Market’s Main Thesis? DeepSeek R1’s Ripple Effects
China’s AI breakthrough challenges the assumptions underpinning U.S. stock market growth and economic optimism.
Nick Tomas
January 27, 2025 • Estimated Reading Time: 7 minutes
Table of Contents
A Major Shift in the U.S. Economy and Markets
A significant narrative shift has just occurred, driven by developments from our largest economic rival, China. This shift has serious implications for U.S. stock valuations and the economy, especially as we navigate a credit cycle slowdown that is likely heading toward a recession.
At its core, this disrupts the narrative around artificial intelligence (AI), a key pillar of the current bull market and economic expansion. AI has been propping up the U.S. economy, but this new development could change the game entirely.
What Happened?
Last week, Chinese AI developer, DeepSeek, launched a new AI model, R1, as a direct competitor to OpenAI’s ChatGPT and other AI chatbots. The big news, however, came last night with claims that R1 is far more energy-efficient and was built at a fraction of the cost of ChatGPT and other US based AI models. Claims that, if true, could shake the foundations of the AI industry.
Why Does DeepSeek’s R1 Matter?
1. Cost-Efficiency
Development Costs: DeepSeek claims it created R1 for just $5.6 million, compared to the hundreds of millions to tens of billions spent by OpenAI, Google, Meta, etc.
Operational Costs: R1 operates on cheaper chips and requires less data, making it more efficient to run than existing models.
2. Technological Advancements
Comparable Performance: R1 matches leading models like ChatGPT in math, coding, and natural language processing.
Human-Like Reasoning: It uses advanced "Chain of Thought" techniques to solve complex problems in a human-like manner. Which according to most who have used it, creates a better user experience.
3. Open-Source Approach
Unlike many proprietary AI models, R1 is open-source and licensed under MIT, allowing anyone, businesses or researchers, to use and improve it freely.
4. Geopolitical Implications
Challenging Export Controls: R1 demonstrates China’s ability to innovate despite U.S. restrictions on advanced AI chip exports.
Reshaping AI Leadership: This could alter the global balance of power in the AI industry, shifting dominance away from the U.S.
5. Industry Reaction
Silicon Valley leaders have called R1 "AI’s Sputnik moment" and a "profound gift to the world," underscoring its potential to disrupt the market and redefine AI's role globally.
Why This Matters to You
DeepSeek’s R1 challenges the cost and energy dynamics of AI, two pillars that have supported U.S. economic growth and stock market optimism. The U.S.'s edge in AI innovation has been a major factor driving stock valuations higher. If this dominance is truly in question, the negative ripple effects on market valuations and economic growth could be substantial.
Why Does This Change Markets and the Economy?
To understand the impact, let’s first revisit the foundation of the current bull market.
The Bull Market Began on October 13, 2022
It was initially driven by the implementation of the CHIPS and Science Act of 2022 and the Inflation Reduction Act, signed into law in August 2022.
CHIPS Act: $53 billion was earmarked for the U.S. semiconductor industry and supply chain investments.
Inflation Reduction Act: This provided funding for infrastructure supporting the technology sector for decades to come.
AI as the Catalyst
On November 30, 2022, OpenAI launched ChatGPT, sparking significant economic and market growth.
The U.S. stock market's growth since then has hinged on AI dominance and the infrastructure to support it.
The thesis for U.S. economic and market growth is directly tied to AI’s growth and dominance. High U.S. stock valuations are built on the belief that America will lead in AI innovation. But with DeepSeek’s R1, that dominance is suddenly in doubt. Whether or not the claims of lower costs and energy efficiency are entirely accurate.
When the narrative supporting U.S. tech leadership wavers, the entire foundation for elevated stock valuations and economic expansion begins to weaken.
What to Expect Next
Skepticism Around Chinese Claims
China has a history of exaggerating economic narratives and achievements. The energy efficiency and cost-saving claims for DeepSeek’s R1 are likely overstated.
However, even if partially true, the announcement forces a re-evaluation of the value of U.S. AI companies, the costs of AI infrastructure, and the energy sectors needed to support it.
Time for Markets to Adjust
The markets will need time to digest this development and determine how much these claims impact AI valuations.
Big money will take time to rotate, so an immediate stock crash or recession is unlikely.
The Bigger Picture
This isn’t just a headline, it’s a game changer. Whether DeepSeek’s cost and energy efficiency claims are accurate or not, it reshapes the global AI narrative.
Over the short to medium term, this development may negatively affect AI-related sectors. However, for AI customers, it’s a win in the long term as operational costs could decrease drastically.
Connecting the Dots
Understanding the economy means identifying which narratives matter most. This is a major narrative shift. It directly challenges the assumptions driving valuations in tech, AI, and related sectors, including energy industries like nuclear power and Small Modular Reactors (SMRs).
This development is significant not just for its potential technological implications but because it signals a possible turning point in the credit cycle that began in March 2020.
Key takeaway: Markets today are fundamentally different from where they stood last Friday.
Why This Matters to You
DeepSeek’s R1 challenges the cost and energy structures of AI. Which are key drivers of the U.S. economy and stock market optimism. If the U.S. can no longer maintain a clear edge in AI innovation, it could spell trouble for valuations and growth in sectors reliant on these technologies.
Prepare for shifts in the AI landscape and their ripple effects across the economy and markets in the coming months.
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