By Tim Courtney, Chief Investment Officer
The introduction of DeepSeek marks an interesting moment for U.S. AI companies as prices move rapidly and markets try to decide if Chinese companies have come up with a better AI model.1 Time will tell if DeepSeek’s claims pan out. But this episode is a great example of what happens in markets when an event, at least temporarily, disrupts assumptions and beliefs about the future.
The market had assumed that a profitable AI tool is around the corner that will create demand for state of the art chips, real estate and water for data centers, and lots of electricity. Judging by the prices of AI providers and related companies, the market assumption is also that these dynamics will continue to play out. In other words, the market extrapolates current trends for years and years into the future. But is that how trends in markets work? Is that how history works? It doesn’t take very long to see that today’s trends are often tomorrow’s disappointments.
Take China itself as an example: if you took the growth rates from the early 2000s and projected them forward, it seemed inevitable that China would become the world's largest economy. That was the very expectation of most economists just 5 years ago. Yet today many predict it will never happen.2 Why? The “inevitable” trend changed. Chinese equity markets went from producing some of the world’s strongest returns to some of its weakest.
We can see from our own recent market history how things change. In 2005, the top five publicly traded companies by market cap were General Electric, ExxonMobil, Microsoft, Citigroup, and BP.3 Microsoft is still a top name, but even its business lines have changed dramatically. In the 1970s, Sears was considered an unassailable retailer, but there were many stories about how K-Mart was challenging Sears.4 Trends change.
There are market, cultural and regulatory forces at work to change trends. Competition, evolving tastes and preferences, and governments change the playing field. Today, we often see companies trading at multiples of 25, 50, even close to 100 times sales.5 This is extreme pricing – and assumes that current trends will continue, unchanged into the future. We know from history this is a big, and quite probably very wrong, assumption.
To be diversified, investors certainly should have exposure to the dominant companies of today. But since trends change, we shouldn’t be overly concentrating our exposure to that or any other area of the market. History says that when we look at the top 10 companies 10 years from now, we will likely be looking at a different list of names.
As we know from markets, history and our own lives, things don’t continue in predictable lines, and we can’t rely solely on a handful of companies to deliver the returns they have in the past. Things tend to change – and if they don’t, we may want to ask why. If you have any questions, don’t hesitate to contact your Exencial advisor.
Sources:
- CNBC (2/7/25) – DeepSeek has rattled large AI players — but smaller chip firms see it as a force multiplier
- The New York Times (9/3/24) – Why it’s so hard for China to fix its ailing economy
- Forbes (6/8/23) – Global 2000 Hall Of Fame: Twenty years of leaders, disruptors and economic upheavals
- CNBC (5/18/18) – It was once the biggest retailer in the US. 125 years later, Sears looks a lot different
- Bankrate (12/16/24) – Trillion-dollar companies: 10 most valuable mega-cap stocks
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