President Donald Trump said the US had a “wake-up call” last week after Chinese artificial intelligence company DeepSeek's R1 model triggered a $1 trillion sell-off in Wall Street tech stocks, but Americans aren’t the only ones rubbing their eyes.
Investors worldwide have poured money into US tech mega-caps over the past decade, and been handsomely rewarded as a result.
Now alarm bells may be ringing as they look at their portfolios and realise just how much exposure they have to an expensive and potentially overhyped sector.
As yet, we don't know if the initial reaction has been overdone. But DeepSeek’s overnight rise has raised questions about the sustainability of AI-fuelled valuations. Investors have woken up. Is it time to get out of bed with US tech?
Tony Hallside, chief executive of Dubai-based broker STP Partners, remains optimistic about the broader AI investment landscape, viewing DeepSeek as an indicator that the market is maturing and becoming more competitive.
“The AI boom has been one of the most transformative forces in markets, with Nvidia, Microsoft and other US tech giants leading the way. Their dominance has been built on groundbreaking innovation and massive capital investments. Nvidia has been instrumental in powering the AI revolution, and its role remains as strong as ever,” he says.
Mr Hallside argues that DeepSeek simply adds another exciting chapter to AI’s rapid evolution. “What’s remarkable isn’t just its capabilities, but how cost-efficiently the model was built. This demonstrates that AI innovation is expanding, and new players are finding ways to build on the foundation laid by current market leaders.”
If DeepSeek really did cost just $5.6 million, as claimed, this throws open the doors for innovation by companies that haven't got tens of billions at their disposal.
“Investors who look beyond Silicon Valley could benefit from this shift,” Mr Hallside says.
Andreas Hasellof, chief executive of Ombori, a technology company that specialises in digital transformation solutions, echoes this sentiment, saying DeepSeek’s arrival could drive AI rather than hinder it.
“Cheaper and more accessible AI models will lead to broader adoption, which in turn fuels demand for infrastructure, whether it's data centres, cloud computing or high-performance chips. Industries like health care, logistics and manufacturing should enjoy substantial productivity improvements as AI becomes more affordable.”
Mr Hasellof says US tech valuations remain exceptionally high and “a correction is not only likely but healthy”.
“The AI boom has disproportionately benefitted a few mega-cap stocks, and historical trends suggest that such concentration usually levels out.”
This could lift regions beyond the US, he adds, with the UAE and Saudi Arabia poised to benefit as they embrace AI-driven productivity gains, Mr Hasellof adds.
Mathieu Racheter, head of equity strategy research at Julius Baer, says DeepSeek gave investors the “perfect excuse to trim their exposure to US equities”.
Julius Baer has been warning that after two strong years for the US market, the risks of short-term market corrections are relatively high.
“Whether the current sell-off will turn out to be a short-term blip or the start of a market correction is still open,” Mr Racheter says.
Investors should diversify beyond US large-caps towards cyclical sectors, such as “industrials, financials and US mid-caps”, he suggests.
Laith Khalaf, head of investment analysis at AJ Bell, warns that many investors are more exposed to tech than they realise due to another red-hot investment trend of the last decade: passive exchange-traded funds.
He notes that an ETF tracking the S&P 500 invests a third of its portfolio in just seven companies: Alphabet, Apple, Amazon, Microsoft, Meta Platforms, Nvidia and Tesla.
head of investment analysis, AJ Bell
Even ETFs designed to track a spread of global stocks are incredibly concentrated in the world’s biggest economy.
“A typical global tracker invests around three-quarters of its portfolio in the US, and a quarter in the Magnificent Seven,” Mr Khalaf says.
Investors should see DeepSeek as a trigger to diversify into other regions or sectors, he adds. “Probably the simplest strategy is to shift into other regions such as the UK, Europe, Japan or emerging markets.”
This can be done passively through passive funds like Amundi UK Equity All Cap ETF, Vanguard FTSE Developed Europe ex UK ETF, Fidelity Index, Japan iShares Core MSCI EM ETF or other ETFs tracking these markets, Mr Khalaf recommends.
“Another option might be the iShares S&P 500 Equal Weight ETF, which allocates money to each of the stocks in the US index equally,” he adds.
Vijay Valecha, chief investment officer at Century Financial, also suggests that this could be a good time for investors to take a more balanced approach.
This doesn't mean abandoning AI, instead, he suggests investors shift focus from hardware to software.
“After DeepSeek, it seems plausible that software companies could work with reduced computing power for AI model training. This might lower costs related to obtaining a high number of graphics processing units, boosting end users,” he says.
Mr Valecha highlights three ETFs that could offer investors instant diversification beyond the tech mega-caps:
iShares Russell 2000 ETF: Small-cap companies are expected to see earnings growth of 46 per cent this year, he says, compared with 21 per cent for the Nasdaq 100. “Falling interest rates and Mr Trump’s focus on domestic companies could add tailwinds.”
iShares MSCI China ETF: DeepSeek’s emergence has spurred domestic competition, with Alibaba’s Qwen 2.5 AI model entering the fray. “China’s government-backed stimulus measures also provide strong economic support,” Mr Khalaf says.
iShares US Financials ETF: As AI integrates into financial services, automation and efficiency gains could boost banking and insurance profitability, he adds.
The emergence of DeepSeek doesn’t spell the end for US tech dominance, but it may mark the start of a broader AI revolution.
With US valuations stretched and market concentration at extreme levels, investors may want to widen their horizons beyond the US. Countries like the UAE, Saudi Arabia and China may increasingly shape the AI landscape. FTSE 100 dividend stocks may also offer diversification. They’re still cheap, too.
However, investors should resist the temptation to overdo it. US tech has proved incredibly resilient, and it's not beaten yet.
Some have described DeepSeek as a “Sputnik moment”, referencing the Soviet Union satellite that delivered an even bigger shock to US supremacy in 1957. The US still won the space race in the end. So don’t write off its tech sector just yet.
