For over two years, the US stock market has experienced a significant surge, with key indices such as the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite reaching record highs. The driving force behind this upward trend is the rapid growth of artificial intelligence (AI).
However, recent events have exposed a crucial flaw in the AI revolution: overestimating its adoption rates and early-stage utility. China-based DeepSeek unveiled an open-source large language model, which trained on slower Nvidia chips at a fraction of the cost of top tech giants like Microsoft and Amazon.
This revelation sparked a significant sell-off in AI stocks, with Nvidia experiencing its largest nominal decline in market cap for a single session. While investors initially questioned whether demand for AI products could be affected, a closer examination reveals that many businesses lack clear plans to monetize their AI investments or optimize their hardware and solutions.
The key issue lies in the premature optimism surrounding AI adoption rates. Companies have been spending billions of dollars on building out AI data centers, but few have established clear strategies to generate returns on these investments. The AI industry’s rapid growth is not yet accompanied by substantial profitability.
While AI does hold significant potential for long-term utility across various industries, its early-stage development is subject to the same principles as other groundbreaking technologies. A similar bubble-bursting event occurred in the dot-com era after nearly a decade of initial proliferation.
As DeepSeek’s emergence serves as a reminder, it is essential to recognize that AI will not be an exception to this pattern. Overly ambitious investor expectations can quickly deflate in the AI sector once reality sets in.
Source: https://www.fool.com/investing/2025/02/04/deepseek-just-exposed-biggest-flaw-ai-revolution