Deepseek shook the markets yesterday, mostly through headlines in terms of the overall market and through fear in terms of AI related stocks. When valuations are demanding, air pockets are created, where prices discount irrational growth expectations and any piece of news that attacks those expectations causes a reality check, with it’s corresponding correction. The impact may be short-lived, but yesterday’s episode reminds us that we are at the end of the cycle and some valuations are frothy. If we go slightly deeper into fundamentals, you can see that profit margins, which are cyclical, are historically high for the tech sector, and higher is you zoom into mag7, and flat for the rest of the market around the historical average. Deepseek is just an example of an agent that can provoke that cyclicality.
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