Investing.com -- The outperformance of the US equity market is not over yet, despite the challenges presented by DeepSeek’s new AI models, according to Capital Economics.
Following a sharp Monday sell-off, US equity markets have turned more positive in the more recent sessions, with a modest gain on Thursday and indications of a positive opening for Friday.
Non-US markets have staged an even better performance. “Despite not really struggling much, if at all, on Monday, they've joined in the subsequent recovery rally anyway and comfortably outperformed the US so far this week,” Capital Economics said in a Friday report.
The firm does not see DeepSeek as a fundamental threat to the broader AI buble. “If anything, the interest in it emphasizes the hype around the technology,” the report states.
Capital Economics recalled the final year of the "dotcom bubble," when US stocks began to underperform compared to their developed market peers, despite making substantial gains. While acknowledging the potential for a similar period of underperformance triggered by DeepSeek, the firm believes it is premature to dismiss the US market's prospects.
“Al technology is still evolving very quickly and we think the US big-tech sectors are well-placed to remain at the forefront of it,” Capital Economics continued.
It also pointed out that potential Chinese competitors are likely to face challenges due to increasing export controls.
Furthermore, Capital Economics touched on the looming threat of tariffs, which could impact global equity markets. The firm suggested that while tariffs might not be favorable for US stocks in absolute terms, they could have a more detrimental effect on equities in other regions.
Drawing from past experience during the trade war under President Trump's administration, the research company highlighted that US equities outperformed Chinese stocks, which were the main target of tariffs at the time.
“If Trump follows through with his latest tariff threats, the US stock market might again weather them better than most,” the report concluded.