by Louis Navellier
February 4, 2025
After last week’s “sneak attack” by China’s DeepSeek AI competitive release, many investors are now questioning whether America’s chip-hungry and energy-intensive AI industry will win the global AI race.
DeepSeek is bragging that its AI search algorithms use 29% less power than ChatGPT and other AI search engines. This is a shocking claim and – on the surface – is indicative that DeepSeek may not be using the industry-leading re-generative AI architecture that Nvidia has pioneered. I think there may another reason as well. With our company’s expertise in designing quantitative models, I know that there is something called “degrees of freedom.” This keeps us from using non-correlated data in our quantitative models – otherwise, we run the risk of creating “garbage in, garbage out.” I suspect that DeepSeek follows this “degrees of freedom” rule to simplify their AI searches and not waste energy on non-correlated data.
Last week, The Wall Street Journal reported that DeepSeek claims that its R1 and V3 models performed better than (or close to) leading Western models, like ChatGPT. Since DeepSeek’s success has occurred despite the Biden Administration’s export curbs that were designed to limit the sales of the advanced AI chips that Nvidia makes, the entire roadmap of how AI is supposed to evolve is now being questioned.
To sort this all out, Google, Meta, Microsoft, OpenAI and other AI search providers are digging into what DeepSeek does and what their respective AI search engines do, but I am very confident that even if DeepSeek has a temporary AI advantage its success may not persist, because, as President Trump said, Silicon Valley received a “wake up call” for U.S. companies to re-assert their dominance over AI.
Companies that were the hardest hit in the wake of the DeepSeek news were those helping to expand the utility grid for new data centers – like Argan (AGX), Comfort Systems USA (FIX), Eaton Corporation (ETN), EMCOR Group (EME), Powell Industries (POWL), Power Solutions International (PSIX), Vertiv Holdings (VRT) and Vistra Corporation (VST). As a result, these companies became, in my opinion, oversold.
But the notion that DeepSeek is going to reduce AI electricity demand is highly improbable, and Nvidia (NVDA) was not hit as hard last Monday as these companies helping to expand the utility grid. This is actually a good sign.
Another interesting component to the sell-off is that short selling is not allowed in China. The fact that a private Chinese company, DeepSeek, triggered this market sell-off – one that temporarily asserted China’s AI dominance vs. Silicon Valley’s AI dominance – makes me wonder if China may be conducting a propaganda campaign to embarrass Silicon Valley and the Trump Administration right off the bat. In other words, a new AI economic war could be breaking out, and I would not recommend any investors sell Nvidia and companies helping to expand the utility grid due to possible Chinese propaganda. I strongly recommend we “take sides” by picking Silicon Valley and the Trump agenda versus the Chinese Communist Party.
This Chinese attack also came during the biggest week for earnings announcements, so I am expecting wave after wave of earnings to come out and drive our fundamentally superior stocks higher. I should add that it is unwise to sell stocks before their earnings announcements, as challenges to companies prior to their earnings announcements are common – and will likely disappear as this earnings season heats up.
President Trump’s embrace of AI infrastructure and his criticism of the European Union (EU) harassing U.S. technology companies with fines and extra taxes at Davos clearly signaled that his administration wants to assert U.S. technology dominance, so the new narrative that a Chinese app, DeepSeek, will derail Nvidia, and other tech leaders, will not likely persist, since the last thing Trump wants is a China win.
If you need any evidence that President Trump wants to win, just look at the immigration dispute with Colombia. After Colombia first refused to accept two U.S. military planes deporting immigrants, President Trump immediately imposed a 25% tariff on all Colombian goods sent to the U.S. Colombia then abruptly reversed its policy. White House Press secretary Karoline Leavitt said, “The government of Colombia has agreed to all of President Trump’s terms, including the unrestricted acceptance of all illegal aliens from Colombia returned from the U.S., including on U.S. military aircraft, without limitation…”
President Trump’s call for central banks around the world to cut key interest rates is happening naturally, since much of the world is in a recession. The FOMC statement on Wednesday signaled that the Fed was hitting the “hold” button and that they were waiting for more progress on inflation. The FOMC statement said inflation was “somewhat elevated,” but they also removed their 2% inflation target. The FOMC statement said that the risks to their inflation and employment goals are “roughly in balance” and that the “extent and timing” of additional key interest rate changes will depend on incoming data and the outlook.
Economists were not expecting the FOMC to cut rates last week, but if Treasury yields decline in the upcoming months, the Fed will have no choice other than to cut key interest rates in upcoming months. The European Central Bank (ECB) has already signaled that they will be cutting key interest rates at their upcoming meetings, so as global yields decline, U.S. Treasury yields should follow global yields lower.
I should add that the Commerce Department on Friday reported that the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, rose 0.3% in December and 2.6% in 2024. The core PCE rose 0.2% in December and 2.8% in 2024, so it is probably wise that the Fed ended its 2.0% target.
Most U.S. Economic Indicators Need Some Trump “Shock and Awe”
Existing home sales are now running at the slowest pace since 1995, so it is imperative that mortgage rates decline to boost U.S. home sales, since higher home sales also boost the demand for durable goods.
Speaking of durable goods, the Commerce Department announced on Tuesday that durable goods orders declined 2.2% in December, the fourth decline in the past five months. Transportation orders plunged by 7.4%. Excluding transportation, durable goods orders actually rose 0.3% in December. Excluding defense orders, durable goods declined 2.4%. I expect that under Trump 2.0, durable goods order will improve.
Last Tuesday, the Conference Board announced that its consumer confidence index declined to 104.1 in January, down from a revised 109.5 in December. Economists were expecting a reading of 106, so consumer confidence came in below economists’ consensus expectations: disappointing, but not alarming.
Also, the Commerce Department reported on Wednesday that the U.S. trade deficit surged 18% to $122.1 billion in December, due somewhat to fears of impending tariffs. Specifically, imports surged 4% to $289.6 billion in December, while exports declined 4.5% to $167.5 billion. Interestingly, the Commerce Department also reported that business inventories decreased 0.3% in December, so more imports may be necessary until inventories are replenished. Obviously, President Trump wants to shrink the trade deficit with tariffs, so it will be fascinating to watch how imports and exports change in the upcoming months.
The ECB is becoming more outspoken, saying that the European Union has to become more competitive. It seems to be growing increasingly alarmed at economic weakness in the eurozone. For example, GDP rates in France and Germany contracted in the fourth quarter by 0.1% and 0.2%, respectively. At least three more 0.25% key interest rate cuts by the ECB are anticipated in the upcoming months after their latest 0.25% cut on Thursday. Another sign of euro-zone economic weakness is that Germany’s consumer confidence index plunged to -22.4 in February, down from -21.4 in January, more bad news for Germany.
The Bank of Canada also cut its key interest rate 0.25% to 3% on Thursday, in the sixth straight key interest rate cut by their central bank. Canada is expected to fall into a recession, and, like both France and Germany, Canada is in the midst of a political crisis until a new Prime Minister is picked. Obviously, since 78% of Canada’s exports go to the U.S., that country’s GDP growth is largely tied to President Trump’s 25% tariff, which is now being implemented, so Canada is expected to slip into a recession – but when this tariff spat is resolved and a new Prime Minister takes over, Canada’s recession should end fast.
I have to say that I did not expect President Trump to put a 25% tariff on two of our biggest and closest trading partners, namely Canada and Mexico, since I thought this was just a threat to get them to secure their borders. I now suspect that representatives from both Canada and Mexico will be in Washington D.C. negotiating until the tariff threat is resolved. In addition to all the border security that President Trump demanded, I suspect that he is going to now want some U.S. companies to “onshore” their manufacturing plants in Canada and Mexico, so if this is how President Trump treats our neighbors, I suspect that China, Europe and other trading partners are even more nervous than Canada and Mexico.
And finally, gold hit new highs over $2,800, up 7% in January (with silver up 11%). The Financial Times reported a surge in gold shipments to the U.S., causing a London bullion shortage. The wait to withdraw gold in the Bank of England vaults now takes four to eight weeks, up from normally just a few days. Apparently fears of Trump putting tariffs on gold caused a rush in gold bullion shipments to the U.S.
Navellier & Associates; own Nvidia Corp (NVDA), Argan (AGX), Comfort Systems USA (FIX), Eaton Corporation (ETN), EMCOR Group (EME), Powell Industries (POWL), Power Solutions International (PSIX), Vertiv Holdings (VRT), Vistra Corporation (VST) and Apple Computer (AAPL), in managed accounts and a few accounts own Alphabet Inc. Class A (GOOGL), Microsoft Corp (MSFT), and Meta Platforms Inc Class A (META). Louis Navellier and his family own; Nvidia Corp (NVDA), Argan (AGX), Comfort Systems USA (FIX), Eaton Corporation (ETN), EMCOR Group (EME), Powell Industries (POWL), Power Solutions International (PSIX), Vertiv Holdings (VRT) and Vistra Corporation (VST), Alphabet Inc. Class A (GOOGL), Microsoft Corp (MSFT), and Meta Platforms Inc Class A (META) and Apple Computer (AAPL), via a Navellier managed account, and Nvidia Corp (NVDA), and Apple Computer (AAPL), in a personal account.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
A Deeper Dive into DeepSeek and Nvidia
Income Mail by Bryan Perry
A Major Campaign Promise Kept – Now What?
Growth Mail by Gary Alexander
Is a Monopoly Always Bad? How Can We Tell?
Global Mail by Ivan Martchev
The Cycle of Tariff Recriminations Has Started
Sector Spotlight by Jason Bodner
What Should Investors Do with Nvidia Now?
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