On the surface, the past week could not have been for favorable for the narrative that the AI hardware trade is alive and well.

Following DeepSeek’s revelation that it trained an advanced reasoning LLM on just $6 million, AI investors held their breath, waiting to hear how the most crucial companies driving the AI hardware buildout would update their outlook for CapEx spending in 2025.

Google, Microsoft, Meta, and Amazon all surprised investors by significantly increasing their CapEx spending forecasts. The table below compares investor expectations for CapEx growth following the September earnings reports versus the revised outlook after the December reports:

The takeaway: The average CapEx growth outlook for this year has jumped from 23% three months ago to 40% today—a remarkable increase, especially considering that before DeepSeek, many investors already viewed the 23% growth outlook as aggressive. This sharp upward revision underscores that we are still in the early stages of both the AI hardware buildout and the AI software trade.

In the first few hours of trading after investors became aware of DeepSeek, the Nasdaq dropped 3.5%. AI hardware companies were hit even harder, with Nvidia plunging 17% on January 27th. It wasn’t just Nvidia that felt the pain—our basket of seven AI hardware companies declined an average of 15% on DeepSeek Monday.

Despite the hyperscalers delivering a favorable CapEx outlook, the AI hardware basket has only recovered about a third of those initial losses. As of mid-day February 7th, that basket remains down an averagefrom the market close on Friday, January 24th—just before the DeepSeek news broke.

Had DeepSeek not emerged, and we instead focused solely on the AI spending commentary from this week, I believe this basket would be meaningfully higher than its January 24th close. That gap highlights just how uneasy AI investors are, given the massive rally over the past two years and the lingering fear that those gains could quickly unwind if hardware growth slows over the next six months.

The next major event, of course, is Nvidia’s earnings on February 26th. Spoiler alert: I don’t believe even a strong outlook from Nvidia will be enough to convince anxious investors that the coast is clear. That confidence will build in March, April, and May, as intra-quarter data points trickle in, confirming that AI spending remains on track.

As mentioned, I still believe there’s juice left in the AI trade. That said, at some point, these companies’ growth rates will inevitably slow (coming off massive comps) to the 10-20% range, at which point we should expect multiple compression. While a year may feel like the blink of an eye in investing, I believe AI hardware investors still have room to be pleasantly surprised in the coming quarters.

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