Goldman Sachs: The Market Decline Caused by DeepSeek Does Not Signal the Start of a Massive Downturn

The U.S. stock market drop earlier this week has frightened investors, but the event does not signal a broader decline, according to Goldman Sachs analysts, as reported by Business Insider and Market Watch.

U.S. stocks have been in a growth (bull) market for several years, with one of the main drivers being expectations around the added value AI applications can bring to companies. However, the launch of the AI application from Chinese startup DeepSeek, whose performance is comparable to that of major U.S. companies' apps but reportedly at much lower costs, has called into question one of the key theses of the bull market.

"In our view, this is a correction and not the beginning of a prolonged bear market," wrote the analysts led by Peter Oppenheimer, according to Business Insider.

Goldman's team states that bear markets occur during periods of declining corporate profits due to recession fears. The DeepSeek event affected the AI landscape, but it does not disrupt the robust macroeconomic context. Analysts estimate a 15% chance that the U.S. will face a recession in the next twelve months and expect a slight reduction in interest rates as inflation continues to decrease.

Instead of signaling the beginning of a bear market, the sales at the start of the week indicated that the valuations of top U.S. tech companies had risen to levels that made investors highly sensitive to disappointments. The tech sector's large weight in the S&P 500-where the top seven companies make up about a third of the index-only contributed to the problem, writes Business Insider.

However, according to Goldman, these factors are secondary to solid fundamentals and are not the result of massive speculation. "The growing influence of technology on market returns reflects the much stronger dynamics of technology company profits compared to other industries," the note states, according to Business Insider.

The bank's analysts acknowledge that U.S. stocks seem particularly expensive right now, both historically and compared to other international corporations, but the high valuations are justified by expectations of strong profit growth from Big Tech.

"The dominance of the U.S. stock market, the tech sector, and top companies does not represent an irrational exuberance bubble, but rather a reflection of superior fundamentals," stated the Goldman team, according to Market Watch.

Not all voices on Wall Street believe that DeepSeek's moment is just a corrective episode for the market. Nassim Taleb, the author of The Black Swan, believes that the recent decline of Nvidia's stock, which dropped by 17% in a single day, is a warning sign for investors who have blindly followed the rise of AI sector stocks, writes Bloomberg.

"This is just the beginning. The beginning of a reality check for people. Because now they realize it's no longer something that can't fail. The first crack has appeared," said Nassim Taleb to Bloomberg News.

The massive sell-off of Nvidia stock was triggered by fears that the American giant might no longer dominate the AI sector, after DeepSeek introduced an almost new approach to developing the technology-a fact seen by investors as a threat to the demand for Nvidia-produced chips.

In Taleb's view, the recent drop in the company's stock is modest compared to the significant risks in the industry, writes Bloomberg.

After Monday's drop, the U.S. market is now showing signs of recovery, indicating that investors still find the U.S. tech sector attractive, which could even benefit from DeepSeek's AI model, according to Business Insider.