Market Turmoil: DeepSeek's Impact on NVIDIA and Big Tech
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On the Tape.

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Welcome to the Monday on the Tape podcast. January 27th, Guy Adami, Dan Nathan from the Fountain Blue Hotel in South Beach. That's Miami, Dan. That is. We're here for the iConnections Global Alts Conference. Big few days. I think they have like $30 trillion, Guy, in assets.

under management, you know, reflected by the allocators that are meeting with all the fund managers. It's really a great event. They've been a great partners of ours for what, three, four years? At least. And we're looking forward to that. And we're obviously always joined by Elizabeth Young-Thomas, she of SoFi. EY, how are you? I am good. How are you guys?

We're doing OK. I mean, like you wake up this morning and you have markets. What is this? It would be a markets in turmoil special guy if we were over there at the NASDAQ market site. Actually, we're going to be doing the show Fast Money Tuesday and Wednesday from down here, guy. But when you wake up and you see, you know, the S&P futures down 2 percent, you see the NASDAQ. One point it was down 4 percent, guy. You got to kind of put your antennas up and kind of focus on the drivers of said move.

Right. We don't want to bury the lead. And typically these Monday mornings, it's sort of an overview of the week and some of the things we're looking at. But obviously, I think given the magnitude of some of these sell-offs and what's going on and the news cycle, we've got to start with this deep seek that was sort of bandied about, Dan, on Friday of last week. Some people were starting to get their arms around it, obviously having market implications today. And I think

You know, they're going to be push and pull on this, Dan. People are going to say, you know what? It's actually bullish for NVIDIA. It's bullish for tech. Other people say, here you see sort of some of the vulnerabilities around this trade. But obviously, this is front and center for everybody right now. So really quickly, NVIDIA down 12% on the day. It was down, I think, 14% in the pre-market here. And let's just kind of break down what's happened. So DeepSeek is a Chinese AI company that was founded.

founded, I think a year and a half ago, I think they only raised $6 million. They put out a paper about their open source, large language model. That's basically think chat GPT by open AI that, you know, has better performance, supposedly less power usage. So that means the cost of compute is going to be much less. Why is this important? Why is it that all of the fateful eight is getting drilled today other than Apple? Because we know that they've spent hundreds of billions of dollars to

creating the AI infrastructure, right, to further train these models and then go into the inference phase. And hopefully they're going to get the return on that investment by a whole host of different companies that obviously use that infrastructure. So if all of a sudden this model comes out from China, that is obviously much cheaper and has similar sort of performance, but is moving towards, let's say, different functionality. I think one of the big differentiators is that they're

reasoning model is something that nobody here in the U.S. at least has out there. I'm sure OpenAI, Gemini, all these folks are going to have that. So that's what's going on here. So the question is, if you don't need all this compute, okay, to train these models further and the Chinese have made some sort of breakthrough, then

And basically, and you've been talking about this guy, NVIDIA's 77% gross margins because of the greater demand than supply. That kind of gets weighed on dramatically. So talk to me a little bit about what you see here because I'm just looking at my screens, okay? We're 20 minutes into the trading day.

I have Microsoft is down nearly 4%. Google's down nearly 4%. Amazon's down 2.5%. Tesla is down only 1%. Broadcom getting murdered. And we can get into some of those names. Marvel getting murdered. Also down as much as NVIDIA is. The chip

names are really, really interesting as opposed to the names that are making the models. So just talk to me when you see this sort of performance in a market-leading sort of sector. What we have said for a while, what I have said for a while incorrectly is, you know, when you have a bit of news, and what I thought, what I said was, at these valuations,

these individual names and the market in general has less and less room for error. So we can debate all you want whether or not this technology is going to be disrupted if the disruptor is being disrupted. I don't even necessarily know if that's the point for today's conversation, but I think what you're seeing more of an indictment of the company is an indictment of the valuations and people are waking up to the fact that, oh, wait a second,

Maybe there is competition out there. Maybe these 77% margins that NVIDIA enjoys, they won't enjoy in perpetuity. And maybe at peak, 23% of sales now with today's move, which I think, by the way, is almost half a trillion dollars in market cap being lobbed off. Maybe that metric doesn't make a lot of sense. So I think that's what the market is coming to grips with in the first 20 minutes. But

they're going to have to deal with this a lot more over the next couple of weeks. Yeah. So the big debate is whether this puts more pressures on the hyperscalers, right? And then that's obviously Google, Amazon, Microsoft, let's throw a meta in there to actually spend more, right? Uh,

or whether it means that they're basically the investments that they made in CapEx are going to be somewhat kaput. And I don't mean that. Just the return on that investment is going to be less so. Liz, when you see – and you've been talking about this. So, again, the concentration, the valuations that have been ignited over the last two years, we've been talking about how they don't make a lot of sense. We were just talking before the call.

started here that last year, NVIDIA's performance of 185% or so was 25% of the performance of the entire S&P 500. There were warning bells, screaming in silence here. You get one piece of news like this to Guy's point, and you have people heading for the hills. Yeah. So let's back up a little bit. I think one of the things that we've been talking about a lot and that I've been concerned with, and this is not me declaring that

This changes the game entirely. Of course, the market overreacts when you get news like this, and this could be an overreaction. But just the idea that in the beginning of a theme, and we're still in the beginning of a theme, you don't declare who the winner is because that is inevitably going to change. And the theme itself is going to evolve the process.

profit that you're going to make off of that theme is going to evolve. We've compared it to the internet many times, and we know that it took 10 to 15 years to figure out all the different ways that the internet would benefit companies and who the actual winners would be. So here we are in a period where now we find out maybe there's a new competitor on the block. Maybe there's a new threat on the block that doesn't necessarily make everybody else obsolete.

but it does change the tune a little bit. And one of the things that we put in our 2025 outlook as a risk was that AI fails to be monetized or earnings disappoint. So one of the things that investors have gotten much more critical of, as we all know, in the second half of 2024 is

was that there had been so much money spent on this theme, now it needs to come to fruition. So now here we are with the suggestion that, well, maybe all that money didn't need to be spent. Maybe there's a cheaper option, right? So all of these questions, I think, are just piling on to a concern that already existed. I mean, let's be honest. The concern was, are we spending too much?

Are we overdoing it? Can it actually produce the profit that we need? And now the question is, maybe there's a cheaper option. We don't even really know the answer to that yet and if this is viable, but that's what's happening today. And I think when you look at, to your point, Dan, just the multiple expansion that's gone on, and this is what I talk about a lot, you've got fundamental support for some of this, which is there as strength, and that's a good thing, earnings and guidance and demand and all of that, the fundamental side of it.

But then you've got multiple expansion that's occurred over the course of 2023 and 2024. And that's what comes under threat in moments like this, when you've got one headline that comes out and it threatens all of that enthusiasm that has really come out just as multiple expansion. Well, it's always perfect to have you on more so today because this sort of dovetails into something that happened last week. Now, President Trump talked about interest rates last week.

and interest rates are too high, and he needs interest rates to come down for a myriad of different reasons, none of which are necessarily important. But we all knew that going into this week, we have a Fed meeting on Wednesday. We have the presser. We have the decision about interest rates. I think I know your answer, but I think I have to ask the question. Do you think with the rhetoric we heard last week and this news potentially disrupting the market, do you

Do you think it puts any pressure at all, not necessarily for this meeting, because I think this meeting, nothing happens. But going forward, do you think this puts added pressure on the Federal Reserve, specifically Jerome Powell? So just to be clear, this meeting still only pricing in a 2% chance of any move by the Fed. So probably nothing happens in January. But by the end of this year, we are now at a solid two cuts priced into the market, which even last week, we were somewhere between one and two. So that's gone up.

a little bit. And that makes sense given that yields have fallen today on some of this news. Does it put pressure on Jerome Powell? I think the real question there is, does Jerome Powell care about what the stock market does?

And really, he doesn't. He shouldn't. Right. But he does care about what the bond market does. And the Fed cares about what the bond market does. They have that financial stability report that they put out. And one of the criteria in it is that basically the bond market or capital markets function as they should. You have to maintain the stability of capital markets, which is why you saw back in 2020, the Fed step in and start buying bond ETFs because the market stopped functioning as it should.

So will they start cutting rates just because the stock market is down or just because tech is down? No, I don't think they will. Will it get interpreted that way? Perhaps. There will be a ton of speculation about it. Will they get political pressure to do so? Probably. And the reaction will be interesting and his comments will be interesting about it. But the reality is

a market drawdown is not what's going to move the Fed, right? And there was a lot of alarms that went off when we had that sell-off in August of last year, suddenly calling for emergency cuts just because there was a sell-off, which I think all three of us thought was a little dramatic.

I think this would be a similar situation, a sell-off in tech and suddenly calling for emergency cuts or some sort of move from the Fed just because of multiple expansion giving some back would be dramatic and frankly would be against what their mandate is. Yeah. And it's a great point you made, Liz, that Fed Chair Powell doesn't care about the stock market. I mean, Guy used to think, what do you say that the dual mandate of the Fed was? Making sure the NASDAQ and the S&P 500 goes higher. And by the way, I'm still not convinced that's not part of it.

But please. Liz just debunked that, though, guy. But you know who cares about the stock market is Donald J. Trump, the president of the United States. And we've seen this playbook before. Going back to 2018, right? There was a little bit of a growth scare. The S&P dropped what guy in the Q4? 19.9%. Yeah. And so then he was jaw-bowling Powell.

back then, you know what I mean, to stop raising interest rates. Powell made a dovish comment. The stock market took off. We've seen this playbook. We might know how it plays out. Maybe not this early in an administration. So it brings you to kind of winners and losers also. I mean, think about what's going on with TikTok. OK, so next to DeepSeek, this was before it got banned from basically being in the app stores. These two apps were the two highest downloaded apps

on Apple's-- so think about that, OK? So now we have TikTok in limbo. Now you have Deep Seek, which many folks think is backed by the CCP, right, as two of the kind of most downloaded apps. TikTok is low-hanging fruit for the Trump administration to ban, to do an about-face on this, right?

Why have we been basically limiting chip sale to China? Because we don't want them to get any advancement on what we have been able to do here. So if this is true, we're going to have to combat this, the U.S. We're going to have to double down a little bit on that. So I think TikTok...

loses in this scenario. The other thing, I just want to talk about other winners and losers. You remember Stargate? Remember that announcement last Tuesday where Sam Altman, the CEO of OpenAI, was sitting next to or standing next to Masa Son of Sauce Bank and Larry Ellison, the chairman of Oracle, and they were talking about this AI infrastructure spend where they're going to spend hundreds of billions of dollars. This calls into question some of that to some degree. And so maybe this was OpenAI trying to get

in front of this deep seek sort of announcement, or at least the recognition of their performance. And then you throw in Elon Musk, right? Who has XAI. He's been spending tens of billions of dollars, if not hundreds on building out their own infrastructure. So a lot of moving pieces here. I just want to make one point as we're talking about the devastation, or one last point, in this chip space and some of the hyperscalers. Guy, look at Apple.

up nearly 2% on the day. And you know, while I was really wrong last year on the performance of Apple since the developers conference when they announced Apple intelligence, I was right on the fundamentals of that. I was wrong on the stock performance. And you know, this stock is up today. You know why? They haven't been spending hundreds of billions of dollars to train their own models.

And I actually said this the day it came out. I was like, this is a brilliant trick for Apple that they're going to license this technology. And then you found out they weren't even paying OpenAI like a slam dunk, except for the fact that it hasn't done the uptake or the upgrade cycle that you would have expected or the company hoped for it to do that. Now, the last point I promise I'll make about DeepSeek, if this is a large language model that was trained on much less infrastructure spend, then Apple's strategy of

putting a model like that on their devices without having to spend, it ends up looking pretty good. So talk to me a little bit about that. Well, the strategy looks good. And it's like somebody that missed the whole move up in a stock but now looks smart because it's all coming back down. So Apple looks smart. But it doesn't change the fact that AI, spotlights,

specifically is not as much as a driver for Apple. Now, I think what Apple is benefiting from today is what you just said correctly, number one. Number two, on days like today, typically, historically, Apple finds itself as sort of a flight to quality, perceived quality stock. It traded down to a huge support level that we actually talked about. That 220 level made a lot of sense. And they report earnings later this week. So I think people are just looking to square up. So yes, Apple looked

smart, but does that mean it necessarily moves the needle for the stock? I'm not necessarily sure it does because again, it's about the implementation of AI and what it means potentially for sales and they're obviously their services business, which is now 27% of overall revenue. Yeah. So Liz, when you think about, we've talked about the concentration, we've talked about like the expected earnings participation of these major names. So they're getting slayed again outside of Apple.

but I'm seeing money move into software, right? So if I'm looking at my main fact set screen, I'm seeing some retailers trade pretty well. I'm seeing some industrials trade pretty well. I'm seeing oil stocks trade pretty well. So if we were to see a sustained movement out of the fateful eight, can the S&P...

hold in there, okay, with other, like broadening out. If money is coming out of those big mega cap tech names, it's gotta go somewhere. We have a 10 year yield still at 4.55 or something like that. So there are some attractive alternatives. But if you have folks coming to you and say, okay, I'm ready to take some profits in some of these names that have been huge drivers of performance,

Where do you go? What sectors? Yeah, this is actually a really interesting question. So I think this can go one of a few ways. The first of which is if people are still optimistic about the economy, we're still in this pro-growth, pro-cyclical environment. This actually does fuel the broadening out trade because people won't want to take the money out of the stock market. So then you just look for other opportunities within the stock market. But think about why we owned or why everybody owned

all of these stocks. It was for growth opportunity. So the first place you want to look is where is their growth opportunity? And one of the places that I continue to think there is opportunity is in healthcare. Look at pharma and biotech. Those are traditionally growthy industry groups within a sector that sounds traditionally defensive in the large cap space, but I think that could be a beneficiary. And then to your point about retailers, I mean, yeah, looking across my screen at just the stocks that I watch on

in consumer discretionary, there's more green than red right now. So looking at retailers, if you're not worried about the consumer getting directly hit by this, this is really more of a company thing right now, a company specific CapEx issue right now. If we're not worried about the consumer getting hit by this yet, then you've got retailers in some of that discretionary space that can do well.

Some of the other ways that it can go, however, as a big theme is that this has driven sentiment in the market for a couple years. This has driven things higher. This has driven the idea that productivity gains would continue on and on. If that sentiment gets bruised enough,

then you see almost a full turnaround in the stock market. And there's one of those situations where there's nowhere to hide. But I am encouraged today by looking at all of my screens and seeing that despite the headlines and despite how dramatic this seems, there seem to be companies, even in tech, that are still doing okay. And even some of the big, like you mentioned, industrials still doing okay. And those are really the bellwethers of the economy, the bellwethers of

whether or not there are still buyers for cyclicality and economically sensitive names. And so far, that still seems to be the case. Yeah. So Guy, let's just kind of key on this. From the highs in early December to the lows in early January, the S&P was down nearly 5.5%, right? So right now, we have two trading days where the S&P is down about 2.5%. So no reason to panic.

other than those names, obviously, and Liz's, you know, your thought process makes perfect sense. We could have the S&P close unchanged on the day today, and you can still have the NASDAQ down one and a half percent or something like that, again, because of the weighting of those names. But I want to make one point that Liz just mentioned. So if you're looking about the health of the consumer, okay, if you're looking at the health of the economy, make no mistake that the capbacks by those large names were driving a lot of economic performance over the last year and a half. And

And the other one, and you've been drilling in on this, Liz, but Guy, you've mentioned this too, government hiring has been huge, right? So if the mandate of this doge and a lot of this new administration is to cut the fat and really cut a lot of the employees and all these different departments and everything like that,

that actually could really weigh not just on enterprise spending, which drives obviously a lot of economic activity, but if the employment sector were to weaken a little bit because of the government stuff and obviously because of just basically, you know, we saw this in 2020 and 21 where all of these same companies overbuilt on CapEx for a whole host of reasons. 2022, all of these companies had to fire a lot of people. So the government's firing and big tech's firing guy, that could be a problem for employment.

A hundred percent, without question. I mean, and one of the concerns I had last year that never came to fruition was the employment picture was going to start to deteriorate in a meaningful way. But what you just outlined here, I think, is exactly one of the potential reasons why it absolutely could. And I don't think the market is prepared for that

At all. And real quick, and before we get into some of the other things I think that are interesting this week, you know what this could also mean is, you know, nobody really wants to talk about this necessarily, is maybe the Chinese are a lot farther ahead on the chip front than we've given them credibility.

credit for and I think that's what the market is going to come to grips with as well. - Liz, I'd like to get your take on, because this is going to feed right into the kind of trade war tariffs with China. One of the interesting takes I've heard about this is that all the restrictions that we put on the US chip makers as it relates to selling in China has caused Chinese AI companies or tech companies in general

to innovate in a way that we have not needed to because our national champions have had access, right, to those chips. And ironically, you know what I mean? Like that could be one of the worst, if you want to call it, you know, strategy moves from a regulatory standpoint. And again, I think every sort of president would have made a lot of the same decisions about that. But

again, if the Chinese are keeping pace with us with much less, you know, CapEx, that's a bit of a problem. Let's talk about China because over the weekend, you know, Trump, everything that he doesn't like, Colombia, by the way, is one of our biggest allies in Central America, right? And he just threatened 25% tariffs. Sooner or later, all these threats about tariffs and then backing down, do they get sort of blunted a little bit, Liz, in your opinion? And do folks kind of just start de-emphasizing a bunch of those threats?

Well, I think if they're not as effective as we expected them to be, particularly if this thing with China works out to be a real threat, then yeah, they stop being such a headline. They stop being such a threat to stocks. But going back to China specifically, and I want to be clear, this is not me like rooting for China as a country, but-

at the end of last year and even maybe in the fourth quarter of last year, I kept saying, don't sleep on China. They got crushed, right? There was all this stimulus that came out. It didn't really work. They were targeting it more at the stock market, not at the real problems in their economy, which is the real estate sector and domestic demand from their consumers. They still needed to stimulate more. So there was kind of enthusiasm in the stock market, but then it all sort of came back out.

But I continue to say don't sleep on it because I think they are spiteful enough. I think they are determined enough to hit their own growth targets and do whatever it takes to get there. And I think that they will try to do what Japan did in this whatever it takes environment. They just haven't done it all yet.

And I also wouldn't underestimate their ability to be spiteful and competitive in the tech space, which I think is what we're seeing right now. Now, we're going to hear about a bunch of conspiracy theories. Did they have access to chips despite all these bans? Could they have done research in a roundabout way? All of that stuff, right? All of that's still going to come out and already is being talked about. But you cannot underestimate their ability to fight back.

in so many different ways, and they will continue to do that. They're not going to take this laying down, and they may not be the only country like that. So if our expectation is that we just slap tariffs on countries and it solves all of our competitive problems, I think we'll end up disappointed. Yeah, I think excellent points, and you have said that, and I've taken note of that, and today you're seeing at least hints of that potentially coming to fruition.

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Before we get to what I think is interesting at the end of the week in the form of GDP lists, some earnings this week, and there's some big ones, Dan. Microsoft, Facebook, Tesla, I think on Wednesday, Apple on Thursday. You want to throw in a Caterpillar and a MasterCard, but anything you're looking to glean from some of these earnings releases? Yeah, so if you think this is a big AI thematic day today, just wait until Wednesday because I don't think we hit this, but Fed chair up.

Powell is going to get a lot of questions on this, right? And he's gotten questions about AI in the past and what it means for their economic outlook and the like, and really as it relates to employment and the like here. So we're going to get a bunch of stuff on that. I don't expect him to say anything particularly interesting, but I want to go to Microsoft.com

They basically laid out $80 billion in cap backs. This was about a month ago, I think. They put something out, maybe on a blog. But a lot of folks were like, breathe a sigh of relief about that. But I think that was on their fiscal year. As you kind of get into the calendar year, that number seemed probably less than some people expected.

I've long thought that once the CapEx slows down, that's when a lot of the performance in these stocks slow down. So it'll be really interesting to hear what Meta, who just announced $65 billion at least on CapEx, Microsoft in and around that $80 billion. Let's see if they kind of clarify that. And I would expect these companies to come out swinging and try to, you know, kind of articulate why their models are bad.

better and safer than that of deep sea. There are a lot of people having a lot of conversations around this right now. Was the spend necessarily where they're looking at CapEx? And to your point, so much of what was this market performance, obviously the stories, but the underlying CapEx has been the driver. Before we get out of here, Liz, I think GDP at the end of the week

is interesting, given some of the commentary we've had over the last half hour or so. Thoughts on GDP? Is it a market moving thing? If you're bullish in the market, which obviously 99 and 1/2% of the people are, what should they be rooting for in GDP? A strong number or a number that sort of comes in a little less than was expected?

Well, I think after the headlines, if this continues for the rest of the week, there's these concerns over tech. I think you do root for a strong number and that drives the broadening out trade even more. And that can make up for what tech may take away this week from the market. But the expectations are quarter over quarter GDP to be 2.7 percent. Now, anything above, let's say, two, two and a half is good and quite above trend. The Fed has estimated trend at being about

1.8%. So long-term GDP growth, given that we're such a developed economy, two-ish is something that we should be happy with. So seeing all these prints above 2% has been really good. The other thing that we get on Friday is PCE. And I think that that probably has more potential to be a market moving event. You certainly don't want to see GDP come in below expectations, but I think on expectations or slightly above would be a good thing.

PCE could be something that moves the market. Now, normally PCE is not as watched as CPI, and I think that continues to be the case. But if we get some kind of surprise, then that would probably move things around.

because of our renewed focus on inflation and the fear of it overheating again. Well, what was a busy week coming into this week has just gotten a lot busier. We're down here in Florida for the next couple of days. Market call today at one o'clock. A lot for us to talk about. Okay, computer. I have Gene Munster, Deepwater Asset Management. This is right in his wheelhouse. We're going to record this afternoon, probably close to the close. So it'll be giving us a good indication how these stocks...

are trading and that's going to drop tomorrow morning. So definitely, you know, check that out. And Guy, just from a trading perspective, when you have an open like this and some of the biggest drivers in the market, what do you want to see? Do you want to see closing on the lows, huge volume, open lower tomorrow, and then you maybe get the bounce? Or if you were to get a bounce intraday and kind of, you know, close midway of the range, that's kind of a dicey setup. Don't you think so? Well, to answer that question, I think the worst thing that could happen, in my

opinion today is some sort of rebound that brings the S&P down instead of being down 100 handles down 35 or 40. The market participants say, you know what, we've seen this before. They all breathe a collective sigh of relief. Their whole buy the dip mentality is

further fortified because they're being rewarded for it. And again, you get lulled in this false sense of security. I think actually the best case for the market is put a little bit of fear in it, get a VIX maybe north of 26 or 27, get that flush you're talking about, and maybe the system sort of resets. Yeah, no doubt. So we're going to be 1 o'clock, market call. Check it out. We're going to be charting it. We'll go over whatever news incrementally that comes out.

And then Gene Munster, Deepwater Asset Management. Liz Young Thomas, thanks for being here early. We'll see you all later.