US Stocks Tumble as Groundbreaking Chinese AI DeepSeek Shakes Financial Markets

US stocks experienced a significant downturn on Monday, particularly affecting chipmaker Nvidia, which saw a staggering loss of nearly $600 billion in market value. This turbulence in the stock market was triggered by a surprising technological advancement from a Chinese artificial intelligence company, DeepSeek, which has raised concerns about the dominance of the American tech industry.

DeepSeek, a relatively new startup established just a year ago, unveiled its groundbreaking AI model named R1 last week. This model, reminiscent of ChatGPT, showcases impressive capabilities while operating at a remarkably lower cost than similar offerings from established companies like OpenAI, Google, and Meta. DeepSeek’s total investment in the computing power for its base model was a mere $5.6 million, a stark contrast to the hundreds of millions or even billions that American firms typically invest in their AI technologies.

This revelation sent shockwaves through the markets, particularly impacting the tech sector. On Monday, the tech-heavy Nasdaq index plummeted by 3.1%, while the broader S&P 500 index decreased by 1.5%. In contrast, the Dow Jones Industrial Average, boosted by the performance of healthcare and consumer companies, managed an increase of 289 points, or approximately 0.7%. However, stock market losses were initially much more severe at the day’s start.

Meta recently announced its intention to invest over $65 billion this year in AI development. Sam Altman, the CEO of OpenAI, previously claimed that the AI industry would require trillions of dollars in investment to support the development of the essential chips needed for the energy-intensive data centers that power complex AI models. Meanwhile, Marc Andreessen, a prominent tech investor and supporter of former President Donald Trump, labeled DeepSeek’s development as “one of the most amazing and impressive breakthroughs I’ve ever seen” in a post on X.

The astonishing achievement from DeepSeek is particularly surprising given the United States’ longstanding efforts to limit the supply of high-performance AI chips to China, citing national security concerns. This raises questions about how DeepSeek managed to achieve a low-cost model with less powerful AI chips.

Impact on Tech Stocks

The turbulence in the stock market was heavily felt among US tech stocks on Monday.

Nvidia (NVDA), recognized as the leading supplier of AI chips, saw a dramatic decline of nearly 17%, resulting in a loss of $588.8 billion in market value. This loss marks the largest single-day market value drop in stock history, more than doubling the previous record of $240 billion set by Meta nearly three years ago.

• For context, Nvidia’s loss in market value on Monday surpassed the total worth of all but 13 companies.
• At the start of the day, Nvidia was the most valuable publicly traded stock, valued at over $3.4 trillion, after its shares had more than doubled in the past two years.
• By the end of trading, Nvidia had dropped to third place behind Apple and Microsoft.

Other major players in the tech sector, including Meta (META) and Alphabet (GOOGL), also faced significant declines. Competitors of Nvidia, such as Marvell, Broadcom, Micron, and TSMC, saw their stock prices tumble, as did Oracle (ORCL) and several energy and data center companies.

This downturn had a broader impact on the stock market, given that tech stocks constitute approximately 45% of the S&P 500, according to Keith Lerner, an analyst at Truist. Lerner stated, “The bottom line is the US outperformance has been driven by tech and the lead that US companies have in AI. The DeepSeek model rollout is leading investors to question the lead that US companies have and how much is being spent and whether that spending will lead to profits (or overspending).”

This week marks the beginning of a series of earnings reports from tech companies, and their reactions to the DeepSeek announcement could result in further market volatility in the coming days and weeks. In light of this, investors are increasingly scrutinizing Chinese AI enterprises.

• Charu Chanana, chief investment strategist at Saxo, noted: “Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand.”
• She added that the rise of DeepSeek could rekindle investor interest in undervalued Chinese AI companies, presenting an alternative growth narrative.

Investment Shifts

The news surrounding DeepSeek’s breakthrough also triggered a substantial shift in investments away from technology companies on Wall Street.

Energy companies, which had seen considerable stock price increases in recent years due to the high energy demands of AI data centers, faced significant declines on Monday. For instance:

• Constellation Energy (CEG), involved in the proposed revival of the Three Mile Island nuclear plant for AI power, dropped by 21%.
• Vistra (VST) fell by 28%, while GE Vernova (GEV) decreased by 21%.

Moreover, futures for natural gas, a key resource for electricity generation, fell by 5.9%, and oil prices dropped by over 2%. Cryptocurrencies, including Bitcoin, also experienced declines.

Future Considerations

While DeepSeek’s achievement is remarkable, it is essential to consider that one breakthrough may not suffice to undermine years of progress in American AI leadership. A large-scale customer shift towards a Chinese startup seems improbable, suggesting that the market sell-off may be somewhat exaggerated. Alternatively, it could be that investors were seeking a reason to sell.

Michael Block, a market strategist at Third Seven Capital, stated, “Time will tell if the DeepSeek threat is real — the race is on as to what technology works and how the big Western players will respond and evolve.” He remarked that the markets may have become too complacent and were looking for a justification to pull back.

As the industry examines DeepSeek’s claims regarding its cost-effectiveness, there remains skepticism about the truthfulness of a relatively unknown company. Although the R1 model represents a competitive product to ChatGPT, it has yet to prove its capacity to tackle the ambitious AI applications that still demand substantial infrastructure investments.

Giuseppe Sette, president of AI market research firm Reflexivity, emphasized, “Thanks to its rich talent and capital base, the US remains the most promising ‘home turf’ from which we expect to see the emergence of the first self-improving AI.”

This evolving landscape in AI technology continues to be monitored closely as market dynamics shift and investors reassess their strategies.