Bank of America’s top global strategist Michael Hartnett has issued a stark warning that the era of US stock market outperformance is coming to an end, with the emergence of Chinese AI firm DeepSeek serving as a critical catalyst. In a client note released Friday, Hartnett declared that “US exceptionalism now exceptionally expensive, exceptionally well-owned, outperformance to peak in ‘25.”
The strategist’s bearish outlook centers on three key factors, with DeepSeek’s R1 chatbot taking center stage. The Chinese AI company’s recent release sent shockwaves through markets on Monday, as the chatbot reportedly rivals ChatGPT’s performance while boasting a significantly lower production price tag and more efficient energy usage. This development has forced investors to reconsider whether the massive capital expenditures tech companies are pouring into AI infrastructure will generate the anticipated returns.
“DeepSeek means peak in AI capex return expectations,” Hartnett wrote, suggesting that the AI investment boom may have reached its zenith. The revelation that competitive AI models can be developed at a fraction of the cost has raised fundamental questions about the sustainability of current AI infrastructure spending levels.
Beyond the AI disruption, Hartnett points to two additional headwinds: declining government spending and reduced immigration levels. US fiscal spending has exceeded trend levels over the past five years, helping fuel market outperformance. However, President Trump’s administration has attempted to implement a government spending halt since taking office on January 20.
Immigration trends also pose concerns for economic growth. Of the US population’s 3.3 million gain in 2024, immigrants accounted for 2.7 million (84%). According to Cato Institute analysis of Census Bureau data, 78% of job gains from 2019 to March 2024 came from immigrants. The sharp drop in border crossings in recent months could therefore slow job growth and hamper economic expansion.
Hartnett emphasized that these trends don’t necessarily signal a broader market crash, but rather suggest the Magnificent Seven tech stocks are likely to underperform while other market segments could benefit. The biggest risks remain inflation and 10-year Treasury rates, with tariffs posing particular threats. On Friday, major US indexes dropped over 1% after the White House announced 25% tariffs on Mexico and Canada, and 10% tariffs on China, while 10-year yields climbed from 4.5% to 4.58%.
As alternatives, Hartnett highlighted “quiet” opportunities in Japanese and European bank stocks, noting that Japan banks remain 74% below 1980s highs and EU banks are 67% below 2007 highs, with both showing upside potential.
Key Quotes
US exceptionalism now exceptionally expensive, exceptionally well-owned, outperformance to peak in ‘25
Michael Hartnett, Bank of America’s top global strategist, made this declaration in a Friday client note, signaling his belief that the era of US stock market dominance is ending in 2025.
DeepSeek means peak in AI capex return expectations
Hartnett’s assessment of how the Chinese AI firm’s cost-efficient chatbot has fundamentally challenged the investment thesis behind massive AI infrastructure spending by US tech companies.
Investors all-in on US exceptionalism, missing new secular bulls in cheap, unloved Japan & Europe banks
Hartnett’s recommendation that investors look beyond US markets to undervalued opportunities in Japanese and European banking sectors, which remain significantly below historical highs.
Our Take
The DeepSeek disruption represents more than just a competitive threat—it’s a fundamental challenge to the AI investment narrative that has driven tech valuations to historic levels. The market’s reaction reveals deep-seated anxiety about whether the AI revolution will follow the profitable trajectory of previous tech booms or become commoditized faster than anticipated. Hartnett’s analysis is particularly noteworthy because it connects AI developments to broader macroeconomic factors like immigration and fiscal policy, showing how multiple headwinds are converging simultaneously. The shift toward international markets, particularly Japanese and European banks, suggests sophisticated investors are already repositioning for a post-American-exceptionalism world. However, it’s worth noting that previous predictions of US market decline have often proven premature. The real question is whether DeepSeek represents a genuine inflection point or merely a temporary disruption in the ongoing AI arms race.
Why This Matters
This analysis represents a significant shift in market sentiment regarding AI investment and US market dominance. DeepSeek’s emergence as a cost-effective AI competitor challenges the fundamental investment thesis behind hundreds of billions of dollars in AI infrastructure spending by major tech companies. If competitive AI models can be developed at dramatically lower costs, the massive capital expenditures by companies like Microsoft, Google, and Amazon may not generate the expected returns, potentially triggering a reassessment of tech stock valuations.
The implications extend beyond individual companies to broader questions about US technological leadership and market exceptionalism. For years, American AI firms have justified premium valuations based on their perceived technological superiority and first-mover advantages. DeepSeek’s breakthrough suggests that innovation can emerge from unexpected sources at lower price points, democratizing AI development and potentially redistributing market power globally.
For businesses and investors, this signals a potential rotation away from concentrated tech positions toward more diversified global opportunities. The combination of AI disruption, fiscal tightening, and immigration restrictions creates a perfect storm that could end the decade-long outperformance of US stocks, particularly the Magnificent Seven tech giants that have driven market gains.
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