DeepSeek – AI’s Sputnik moment?

In 1957, at the height of the Cold War and Space Race, America was stunned by the Soviet Union’s launch of the first artificial Earth satellite – Sputnik 1.

Fast-forward to today, and America’s AI (artificial intelligence) supremacy is being challenged by China’s DeepSeek-R1, in what one Silicon Valley venture capitalist has described as ‘AI’s Sputnik moment.’

US AI beneficiaries, such as Nvidia and Microsoft, have powered the US equity market higher over the last few years. Analysts predicted another technology step-change that will transform our lives and how businesses operate. Given the hype about AI, it is not surprising that in his first week in office, President Trump proudly announced the Stargate Project, a US AI joint venture created by OpenAI, Softbank, Oracle, and investment firm MGX to raise $500bn for AI infrastructure investment.

Just over a week ago, Chinese AI app DeepSeek was reported to have overtaken ChatGPT and other rivals to become the top-rated free application on Apple’s App Store in the US, UK, and China. Given it was only launched in January, its surge in popularity has challenged the widely-held belief that America is the untouchable leader of the AI industry.

Why is Chinese start-up DeepSeek such a challenge for the US AI sector? It is powered by the open-source DeepSeek-V3 model, which its developers claim was developed for less than $6m. This is significantly less than the $100m some US AI models are reported to have cost to develop, while it further differs by using reinforcement learning. However, President Trump’s AI advisor has accused DeepSeek of intellectual property theft via ‘distillation’ using the outputs of OpenAI to develop similar capabilities.

Nonetheless, the launch of a low-cost Chinese AI tool has come as a major surprise to investors, the US AI technology companies, and most significantly, their supply chain. Indeed, DeepSeek could potentially de-rail the investment case for the entire global AI supply chain – less need for high-end AI chips, less energy required for AI datacentres.

Given DeepSeek could challenge the dominant positions of US companies, such as OpenAI, will President Trump impose even greater restrictions on the availability of Nvidia’s most advanced AI chips? We have highlighted the ongoing long-term technological battle between the US and China in previous Alpha Bites, and this looks to be just the latest twist in the long-running saga. Furthermore, given US concerns about TikTok, there will be inevitable concerns about data stored in secure servers based in China.

During the Space Race, while Sputnik shook America, Neil Armstrong was still the first man to set foot on the Moon. Perhaps, like Sputnik, DeepSeek will be a wake-up call for the US AI industry. Some are even suggesting Jevon’s Paradox may apply, where cheaper costs will mean broader and faster adoption of AI to the benefit of all of us.

What have we been watching?

DeepSeek and Trump tariffs!

The DeepSeek news sparked a sell-off in global AI tech stocks at the start of last week. For example, AI chip developer Nvidia fell by 17% wiping over $500bn from its market value- the biggest single-day loss of value in US market history! Besides less AI chips being required, the main concern for investors in the AI sector appears to be the massive amounts of capital expenditure on AI (chips/data centres) when the pace of take-up and revenue from AI is still difficult to quantify, as are the eventual returns from all this investment. Given AI stocks have traded at a sizeable premium to the wider market, it is little surprise that the sudden arrival of a cheaper challenger has knocked share prices. This looks like an AI-specific issue, as 70% of S&P 500 companies were up/unchanged on the day of the AI sell-off.

Trump 2.0 appears even more unpredictable! Markets had been expecting tariffs to be gradually phased in. Instead, over the weekend, President Trump imposed 25% tariffs against Canada and Mexico, citing a major threat from illegal immigration and drugs. A 10% tariff will be imposed on China in addition to those already in place. Trump also suspended exemptions allowing low-value imports from the three countries to enter the US duty-free. The news un-nerved markets due to inflationary concerns while raising the prospect of counter-tariffs and risk to global economic growth. The additional low-value import measure could also cause disruption to global supply chains. Trump said he will hit the EU with tariffs and that ‘the UK is out of line but can be worked out.’

As the third anniversary of Russia’s invasion of Ukraine approaches, Trump’s tariff and sanction threat appears to be having an impact on Russian oil exports. Both China and India are reported to have halted Russian oil imports due to the new US sanctions. Russian oil tanker freight rates have surged higher while Indian banks have blocked payments for Russian oil imports. Could Trump force Putin to the negotiating table and so bring about a ceasefire in the war in Ukraine?

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As Chancellor Rachel Reeves tried to talk up the UK economy and growth measures this week, three leading Wall Street firms lowered their UK economic growth forecast for 2025 from 1.3% to 0.9%. This compares with the Bank of England forecast of 1.5% growth. Chancellor Rachel Reeves is becoming increasingly desperate to talk up the UK economy. Her latest growth ambitions include a third runway at Heathrow and transport infrastructure for an Oxford-Cambridge ‘Silicon Valley.’ While positive longer-term, it does have the feel of ‘jam tomorrow,’ particularly as the government is dithering over numerous current defence and infrastructure projects ahead of the OBR report on 26^th March! Even worse, the government has already dropped the ball, as Astra Zeneca has abandoned a £450m investment in its UK R&D facility in Liverpool!

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The European Central Bank (ECB) cut interest rates by 0.25% as widely expected with the deposit rate cut from 3% to 2.75%. ECB President confirmed that the interest rate-cutting cycle is on track and is confident that inflation will hit the target in 2025 with wage inflation cooling. Markets are assuming the ECB will make another 0.25% cut in March.

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In the US, the Federal Reserve (Fed) defied President Trump by keeping interest rates on hold with the federal funds range at 4.25%-4.5%. The vote was unanimous. The Fed said that inflation remains ‘somewhat elevated.’ In the press conference, Fed Chair Jerome Powell, when asked whether a March rate cut was on the table, referred to the strong economy and reduced downside risks in the labour market, playing down the likelihood. ‘We do not need to be in a hurry to adjust our policy stance.’ Markets are still working on the premise of two potential interest rate cuts this year by the Fed, totalling 0.5%. The 10-year US Treasury yield remained above 4.5%. Clearly a lot rests on President Trump’s tariffs, which would initially be inflationary. 

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Even Brent oil succumbed to the DeepSeek effect, falling below $77. This was on the basis that the Chinese AI tool will require less energy to run than US AI data centres!

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Finally, following our recent Alpha Bites ‘You don’t know what you’re doing’ football analogy. Mindful of ‘Rachel from accounts’ ever more desperate attempts to spark some life into the UK economy. During questions about her latest growth plan, the Chancellor said she and PM Sir Keir Starmer were a ’strong team.’ We couldn’t help thinking of that great football manager Brian Clough. ‘We had a good team on paper. Unfortunately, the game was played on grass.’ 

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Read Last Week’s Alpha Bites – Elon Musk – political influencer

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.