In the 1940s and early 1950s, computers were the size of buildings and used vacuum tubes – large glass tubes that were fragile and consumed enormous amounts of power, generating significant heat. A former IBM Chairman famously said, “I think there is a world market for about five computers.”
However, by the mid-1950s, semiconductor chips were invented which were far smaller, more efficient, and performed calculations much faster. This breakthrough led to the information technology revolution that continues today.
The recent reports around a Chinese artificial intelligence company called DeepSeek are reminiscent of the shift from vacuum tubes to semiconductors 70 years ago. Building AI models like those that power ChatGPT has been extremely expensive and only a few companies in the world have the resources to do so. Like the semiconductor revolution that dramatically reduced the size, cost, and power requirements of computing, DeepSeek has reportedly achieved a similar leap in AI efficiency.
What Does the DeepSeek Moment Mean for Investors?
Just as there was a “ChatGPT moment” in late 2022 that sparked the current wave of AI development and adoption, the “DeepSeek moment” could be just as transformative. According to their published technical papers, they were able to build their most recent models with techniques that are 95% to 97% cheaper. There is somewhat of a debate as to the accuracy of this, but that’s above my pay grade.
If true, these developments could represent a fundamental shift in how AI systems are developed and deployed, potentially broadening access to advanced AI capabilities while reducing the massive infrastructure investments currently required. Some investors worry this might mean the world will need fewer or smaller data centers, less processing power, and less energy.
This is the main reason markets, and AI-related stocks specifically, have reacted negatively. On Monday, January 27, Nvidia shares fell 16.9%, the Nasdaq 3.1%, and the S&P 500 1.5%. Despite this immediate reaction, and keeping in mind things can change quickly, the history of markets and technological change can help to provide a longer-term perspective. *Side note: the market had a nice recovery today.
To help make sense of this development, there are three important facts worth remembering.
1. AI stocks have been significant drivers of the broad market
First, it’s no secret that technology stocks, including those in the so-called Magnificent 7, have driven markets over the past several years. Some investors have worried about the sustainability of this rally for quite some time, as well as about market breadth and the potential vulnerability to technological disruption.
Since the S&P 500 is weighted by the size of companies, stocks like Nvidia can become overweighted in investment portfolios. Investors may find that they are less diversified than they would like, or that their portfolios are far more sensitive to the movements of just a few stocks.
Regardless of how technology stocks perform in the coming months, recent market moves are a reminder that investing is not about making a few concentrated bets; it’s about constructing an appropriate portfolio that is aligned with long-term financial goals.
2. Technological advances drive long-term growth
Second, the real benefits of new technologies take years or decades to play out. As computer scientist Roy Amara said, investors tend to overestimate the impact of technology in the short-term and underestimate the effect in the long run.
While markets have shown strong enthusiasm for AI, we are likely still in the early stages of understanding how this technology will reshape the economy and our lives. For example, the latest market reaction is driven by the “supply side” of the AI story, i.e., those that provide chips. The other half of the story – the demand for AI capabilities – is still in its infancy.
This is often described as the Jevons Paradox, which states that increased efficiency can result in greater use of a resource, not less. For example, the invention of semiconductors did not result in just more efficient computers, but the ability to use chips in all devices. This created consumer applications that were impossible to imagine in a world of vacuum tubes. Similarly, the possibility of small but powerful AI models could have transformative effects that require more, not less computing power.
3. Stock market valuations are near historic levels
Finally, stock market valuations are approaching dot-com levels, especially among AI-related companies. This is sometimes referred to as being “priced to perfection,” meaning that current stock prices reflect extremely optimistic expectations about future growth and profitability. When valuations reach such elevated levels, even small changes can lead to significant price adjustments.
Stock valuations are not a market-timing tool and do not predict what markets will do over the coming months. During bull markets, stocks can grow increasingly expensive for long periods. However, valuations can be a useful guide when considering expected future rates of return for various asset classes and your portfolio.
Ultimately, investors should focus on positioning themselves for long-term growth with a properly constructed portfolio and an understanding of current valuations. A well-balanced approach that includes exposure to different sectors and asset classes can help weather short-term volatility while benefiting from technological advancement and economic growth.
Despite recent news and stock market swings, transformative technologies like AI create value over decades, underscoring the importance of maintaining a long-term investment approach and financial plan.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Special Update: What the DeepSeek Moment Means
In the 1940s and early 1950s, computers were the size of buildings and used vacuum tubes – large glass tubes that were fragile and consumed enormous amounts of power, generating significant heat. A former IBM Chairman famously said, “I think there is a world market for about five computers.”
However, by the mid-1950s, semiconductor chips were invented which were far smaller, more efficient, and performed calculations much faster. This breakthrough led to the information technology revolution that continues today.
The recent reports around a Chinese artificial intelligence company called DeepSeek are reminiscent of the shift from vacuum tubes to semiconductors 70 years ago. Building AI models like those that power ChatGPT has been extremely expensive and only a few companies in the world have the resources to do so. Like the semiconductor revolution that dramatically reduced the size, cost, and power requirements of computing, DeepSeek has reportedly achieved a similar leap in AI efficiency.
What Does the DeepSeek Moment Mean for Investors?
Just as there was a “ChatGPT moment” in late 2022 that sparked the current wave of AI development and adoption, the “DeepSeek moment” could be just as transformative. According to their published technical papers, they were able to build their most recent models with techniques that are 95% to 97% cheaper. There is somewhat of a debate as to the accuracy of this, but that’s above my pay grade.
If true, these developments could represent a fundamental shift in how AI systems are developed and deployed, potentially broadening access to advanced AI capabilities while reducing the massive infrastructure investments currently required. Some investors worry this might mean the world will need fewer or smaller data centers, less processing power, and less energy.
This is the main reason markets, and AI-related stocks specifically, have reacted negatively. On Monday, January 27, Nvidia shares fell 16.9%, the Nasdaq 3.1%, and the S&P 500 1.5%. Despite this immediate reaction, and keeping in mind things can change quickly, the history of markets and technological change can help to provide a longer-term perspective. *Side note: the market had a nice recovery today.
To help make sense of this development, there are three important facts worth remembering.
1. AI stocks have been significant drivers of the broad market
First, it’s no secret that technology stocks, including those in the so-called Magnificent 7, have driven markets over the past several years. Some investors have worried about the sustainability of this rally for quite some time, as well as about market breadth and the potential vulnerability to technological disruption.
Since the S&P 500 is weighted by the size of companies, stocks like Nvidia can become overweighted in investment portfolios. Investors may find that they are less diversified than they would like, or that their portfolios are far more sensitive to the movements of just a few stocks.
Regardless of how technology stocks perform in the coming months, recent market moves are a reminder that investing is not about making a few concentrated bets; it’s about constructing an appropriate portfolio that is aligned with long-term financial goals.
2. Technological advances drive long-term growth
Second, the real benefits of new technologies take years or decades to play out. As computer scientist Roy Amara said, investors tend to overestimate the impact of technology in the short-term and underestimate the effect in the long run.
While markets have shown strong enthusiasm for AI, we are likely still in the early stages of understanding how this technology will reshape the economy and our lives. For example, the latest market reaction is driven by the “supply side” of the AI story, i.e., those that provide chips. The other half of the story – the demand for AI capabilities – is still in its infancy.
This is often described as the Jevons Paradox, which states that increased efficiency can result in greater use of a resource, not less. For example, the invention of semiconductors did not result in just more efficient computers, but the ability to use chips in all devices. This created consumer applications that were impossible to imagine in a world of vacuum tubes. Similarly, the possibility of small but powerful AI models could have transformative effects that require more, not less computing power.
3. Stock market valuations are near historic levels
Finally, stock market valuations are approaching dot-com levels, especially among AI-related companies. This is sometimes referred to as being “priced to perfection,” meaning that current stock prices reflect extremely optimistic expectations about future growth and profitability. When valuations reach such elevated levels, even small changes can lead to significant price adjustments.
Stock valuations are not a market-timing tool and do not predict what markets will do over the coming months. During bull markets, stocks can grow increasingly expensive for long periods. However, valuations can be a useful guide when considering expected future rates of return for various asset classes and your portfolio.
Ultimately, investors should focus on positioning themselves for long-term growth with a properly constructed portfolio and an understanding of current valuations. A well-balanced approach that includes exposure to different sectors and asset classes can help weather short-term volatility while benefiting from technological advancement and economic growth.
Despite recent news and stock market swings, transformative technologies like AI create value over decades, underscoring the importance of maintaining a long-term investment approach and financial plan.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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