Did DeepSeek Burst The Bubbles In Nvidia And Stock Market?

February 04, 2025 12:09:33 pm

Source: SeekingAlpha

2025-02-04 12:09:33 ET

Summary

The US stock market is in a bubble, with DeepSeek's low-cost AI model potentially triggering a collapse in mega cap stocks.
The Risk Premium Model and other indicators show extreme overvaluation, suggesting a shift to emerging markets, commodities, and value stocks.
Historic analogues indicate that inflationary cycles favor commodities and international equities over US large caps, echoing the 1970s and 2000–2009 periods.
To mitigate risk, diversify into gold miners, Chinese stocks, and value stocks, avoiding overvalued tech and cap-weighted indices.

By several measures, this letter will show how the US stock market is in a bubble and prone to a collapse. We believe that this past week’s announcement by DeepSeek of a low-cost large language model could be the proverbial straw that breaks the back of this parabolic mega cap market leading to a pronounced and protracted period of underperformance in US cap weighted indices like the S&P 500 and NASDAQ 100. Further, historic analogues for post stock market bubbles, like the 1970s and the 2000 to 2009 period, argue for rotating away from the Magnificent 7 and cap weighted indices and into emerging and international markets as well as into commodities, like precious metals and energy, small capitalization, and value stocks. The US equity market, led by the Magnificent 7 stocks and cap weighted indices, is priced for perfection. The Fed Model, popularized by Dr. Edward Yardeni, also known as the Risk Premium Model, shows that the US stock market has not been this overvalued since the 2000 stock market bubble. What this model shows is that the 10-year US Treasury Yield is greater than the earnings yield of the S&P 500. The chart below shows how the model warned of extreme equity overvaluation in 2000 with ratings in the negative 2 range. Furthermore, this risk premium model showed accurate buy signals in 2009, 2012, and 2020, when the market was deeply oversold and cheap due to the great financial crisis in 2008-2009, the European debt crisis in 2012, and the COVID collapse in March 2020, respectively....