This week, a surprising announcement from China’s Deep Seek sparked a lot of market chatter (and, ya know, vaporized nearly $600B in market value from Nvidia). Deep Seek claims it developed an advanced AI model for just $6 million — a fraction of the billions typically spent by U.S. tech giants like OpenAI or Google. The news has already shaken up the markets, hitting AI-focused stocks like Nvidia particularly hard. But the story here isn’t just about a new AI player; it’s about what this means for market concentration, overhyped narratives, and how we approach investing in an environment where the rules seem to change daily.
If you’ve followed markets over the past couple of years, you know how central the “Magnificent Seven” (Nvidia, Microsoft, Alphabet, Amazon, Apple, Meta, and Tesla) have been to U.S. equity performance. These tech giants have become synonymous with the AI boom, with many investors betting that they’ll dominate the next era of innovation. But Deep Seek’s announcement raises questions about whether the moat around these companies is as wide — or as deep — as we thought.
The Magnificent Seven’s dominance has been fueled at least in part by the assumption that cutting-edge AI requires vast resources: massive data centers, high-end GPUs, and billion-dollar R&D budgets. If Deep Seek’s claims are credible, they challenge this core narrative. How did they manage to build a competitive model for $6 million? Did they use cheaper, lower-powered chips? If so, what does that say about the assumptions driving Nvidia’s sky-high valuations?
The other question is whether Deep Seek sidestepped U.S. sanctions on high-end chips like Nvidia’s A100 and H100. If they found a way to bypass these restrictions — or if they didn’t need those chips at all — it could signal a shift in how AI is developed and which companies can compete. Either way, it’s a reminder that disruption never comes from the players everyone is watching.
Another part of the AI narrative revolves around how to effectively bet on the potential of AI. Obviously you can invest in the main players, hoping to figure out who the big winner will be (does Gemini beat Microsoft’s OpenAI? etc.). The other way a lot of investors have approached the bullish case for AI is buying supporting stocks (chip manufacturers like Nvidia are a clear example of this). Plays involving Oracle or other huge cloud data providers are another way to bet on this via supporting services — LLMs require massive datasets, and betting on data storage seems like a smart play. A third way investors are trying to make an AI play comes in the energy sector.
The consensus has been that AI’s growth will drive significant increases in energy demand as data centers expand and more high-powered chips are deployed. But if Deep Seek really did achieve a breakthrough with significantly less energy and lower chip costs, it could upend these projections.
For investors, this raises questions about whether the future demand for energy (and high-end chips) is being overstated. It also calls into question whether the AI narrative has created a bubble in specific sectors.
This leads us to an important point: AI, for all its potential, is still in the early innings. The hype cycle often follows a predictable pattern — initial excitement, inflated expectations, and then a sobering realization that progress takes time. Right now, we might be nearing the “Peak of Inflated Expectations” when it comes to AI.
The Magnificent Seven have driven an outsized share of S&P 500 returns, making the index more top-heavy than it’s been in decades. When a handful of companies carry the market, it creates a precarious situation. What happens if those companies stumble, or if the AI revolution doesn’t deliver the immediate gains the market is expecting? A concentrated portfolio tied too closely to these giants could face significant downside risk. This is where diversification matters. At City Different Investments, we believe in spreading investments across a broad range of sectors, geographies, and company sizes. Betting on the Magnificent Seven might feel exciting when they’re riding high, but history tells us that over-concentration is a recipe for volatility.
Let’s not forget: OpenAI itself was a scrappy startup before it became the leader in generative AI. It’s a great example of how innovation often comes from unexpected places. While the Magnificent Seven are undoubtedly dominant today, Deep Seek’s emergence reminds us that technological leadership is never guaranteed.
It also underscores that we don’t really know anything about how the AI race will be run. Yes, OpenAI was the clear leader for a couple years… but there were a ton of internet indexing sites and search engines on the market before Google revolutionized search. The same is likely true of AI — we really don’t know who will win, and what technology or capability that win actually powers.
It’s also worth remembering that for all the excitement around AI, practical adoption is still a work in progress. Take Microsoft’s launch of Copilot, the AI-powered addition to Office — it’s been far from seamless in our experience. And while AI holds the promise to revolutionize industries, from healthcare to logistics, many of these breakthroughs are years away from being fully realized.
Meanwhile, even as we talk about artificial superintelligence (ASI) and the ethical dilemmas of autonomous agents, the reality is that most companies and individuals are still figuring out how to use AI effectively. This gap between potential and execution is where overhyped narratives often falter.
At City Different Investments, we focus on building portfolios that are intended to withstand market fads and hype cycles. While AI is an exciting and transformative technology, it’s just one piece of the puzzle. Diversification can be a powerful hedge against the risks posed by over-concentration — whether it’s in a single sector, geography, or set of companies.
Right now, the Magnificent Seven are carrying the weight of market expectations. But if there’s one thing the Deep Seek story illustrates, it’s how quickly narratives can shift. By maintaining a balanced, diversified portfolio, we aim to capitalize on opportunities across the market while mitigating the risks tied to any one theme.
Let’s keep asking questions, challenging assumptions, and investing differently. That’s what makes the journey worth it.
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