A shocking Chinese AI advancement called DeepSeek is sending US stocks plunging
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Developers at leading U.S. AI firms are praising the DeepSeek AI models that have leaped into prominence while also trying to poke holes in the notion that their multi-billion dollar technology has been bested by a Chinese newcomer's low-cost alternative.
Chinese startup DeepSeek on Monday sparked a stock selloff and its free AI assistant overtook OpenAI's ChatGPT atop Apple's (AAPL.O), opening a new tab App Store in the U.S., harnessing a model it said it trained on Nvidia's (NVDA.O), opens new tab lower-capability H800 processor chips using under $6 million.
As worries about competition reverberated across the U.S. stock market, some AI experts applauded DeepSeek's strong team and up-to-date research but remained unfazed by the development, said people familiar with the thinking at four of the leading AI labs, who declined to be identified as they were not authorized to speak on the record.
OpenAI CEO Sam Altman wrote on X that R1, one of several models DeepSeek released in recent weeks, "is an impressive model, particularly around what they're able to deliver for the price." Nvidia said in a statement that DeepSeek's achievement proved the need for more of its chips.
Software maker Snowflake (SNOW.N), openeda a new tab and decided Monday to add DeepSeek models to its AI model marketplace after receiving a flurry of customer inquiries.
With employees also calling DeepSeek's models "amazing," the U.S. software seller weighed the potential risks of hosting AI technology developed in China before ultimately deciding to offer it to clients, said Christian Kleinerman, Snowflake's executive vice president of product.
"We decided that as long as we are clear to customers, we see no issues supporting it," he said.
Meanwhile, U.S. AI developers are hurrying to analyze DeepSeek's V3 model. DeepSeek in December published a research paper accompanying the model, the basis of its popular app, but many questions such as total development costs are not answered in the document.
China has now leapfrogged from 18 months to six months behind state-of-the-art AI models developed in the U.S., one person said. Yet with DeepSeek's free release strategy drumming up such excitement, the firm may soon find itself without enough chips to meet demand, this person predicted.
DeepSeek's strides did not flow solely from a $6 million shoestring budget, a tiny sum compared to the $250 billion analysts estimate big U.S. cloud companies will spend this year on AI infrastructure. The research paper noted that this cost referred specifically to chip usage on its final training run, not the entire cost of development.
The training run is the tip of the iceberg in terms of total cost, executives at two top labs told Reuters. The cost to determine how to design that training run can cost magnitudes more money, they said.
The paper stated that the training run for V3 was conducted using 2,048 of Nvidia's H800 chips, which were designed to comply with U.S. export controls released in 2022, rules that experts told Reuters would barely slow China's AI progress.
Sources at two AI labs said they expected earlier stages of development to have relied on a much larger quantity of chips. One of the people said such an investment could have cost north of $1 billion.
Some American AI leaders lauded DeepSeek's decision to launch its models as open source, which means other companies or individuals are free to use or change them.
"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen - and as open source, a profound gift to the world," venture capitalist Marc Andreessen said in a post on X on Sunday.
The acclaim garnered by DeepSeek's models underscores the viability of open source AI technology as an alternative to costly and tightly controlled technology such as OpenAI's ChatGPT, industry watchers said.
Wall Street's most valuable companies have surged in recent years on expectations that only they had access to the vast capital and computing power necessary to develop and scale emerging AI technology. Those assumptions will come under further scrutiny this week and the next when many American tech giants will report quarterly earnings.
Chinese startup DeepSeek's cheaper AI is sharpening investor scrutiny of the billions U.S. tech giants are pouring into developing the technology and analysts say it will dominate this week's much-awaited results from industry bellwethers.
DeepSeek has claimed it took just two months and cost under $6 million to build an AI model using Nvidia's less-advanced H800 chips. An app powered by the V3 model became the top iPhone download in the U.S. on Monday.
The startup founded in 2023 has said its AI models either match or outperform top U.S. rivals at a fraction of the cost, challenging the view that scaling AI requires vast computing power and investment.
Such a business need has powered an increase of around $10 trillion in the market value of "Magnificent Seven" companies since ChatGPT kicked off the AI boom in November 2022.
"Did DeepSeek really build OpenAI for $5 million? Of course not," Bernstein analyst Stacy Rasgon said. "It seems like a stretch to think the innovations being deployed by DeepSeek are completely unknown by the top tier AI researchers at the world's other numerous AI labs."
DeepSeek's pricing blows away anything from the competition, he said. Shares of AI chip pioneer Nvidia (NVDA.O), opens new tab sank 16%, Microsoft (MSFT.O), opens new tab fell 3.8% and TSMC's U.S. stock tumbled 14%.
AI optimism supercharged Wall Street in recent years
Rasgon and other analysts argue DeepSeek's training costs for its V3 model could be higher as the nearly $6 million cited by the startup only includes the amount spent on computing power, while little is known about the costs to build the more publicized R1 model.
Still, it is a far cry from the $250 billion analysts estimate big U.S. cloud companies will spend this year on AI infrastructure. That spending has been questioned by investors worried about slow returns in the past year.
With most of the American tech giants set to report results this week and the next, analysts and investors expect executives of the companies to offer more clarity on their strategy.
"(DeepSeek's rise) puts into question whether the current pace of capex spending/technology upgrades is necessary. Commentary from U.S. hyperscalers will be key this week to see if they remain aggressive with AI spend," CFRA analyst Angelo Zino said.
"They will likely stress the need for greater computing power as we shift toward agentic AI and physical AI," Zino added, referring to autonomous AI agents that require little human intervention for routine tasks, as well as robots and self-driving cars.
PRICING PUSH
While the price of using AI models has been falling with rising competition and the progress in the technology, Bernstein's Rasgon said DeepSeek stands out as it has priced its models at up to 40 times lower than OpenAI's comparable models.
That could, analysts said, start a price war for AI services, potentially pressuring tech companies such as OpenAI that are already losing billions of dollars each year due to the high operational costs of running services such as ChatGPT.
"If DeepSeek adoption intensifies, it could initiate price reductions from competitors who have similar open source products," said Gadjo Sevilla, senior analyst at eMarketer.
"Market leaders like OpenAI (pushing for profitability) are unlikely to lower pricing in the short term. They will likely double down on trust and safety as key differentiating features, which happen to matter to enterprise users."
Some experts also doubt that U.S. businesses would be willing to embrace Chinese AI technology, given Sino-U.S. tensions and concerns about data privacy and security.
DeepSeek has said it stores user information in servers in China, which could be a sticking point in its U.S. adoption.
Some investors, however, believe American tech giants would pounce on DeepSeek's breakthroughs and that cheaper AI services are bound to increase technology adoption, which could lift demand for chips.
"Did DeepSeek seek and find a more efficient processing model for AI? Maybe, but you can count on the incumbents to adopt any new techniques found," said Mark Malek, chief investment officer at SiebertNXT.
"(This) would only make the AI opportunity bigger in the future."
Wall Street’s superstars tumbled Monday as a competitor from China threatened to upend the artificial intelligencefrenzy they’ve been feasting on.
The S&P 500 dropped 1.5%, dragged down in large part by a 16.9% fall for Nvidia. Other Big Tech stocks also took heavy losses, and they pulled the Nasdaq composite down 3.1% for its worst loss in more than a month.
The damage was focused on AI-related stocks, while the rest of the market held up much better. The Dow Jones Industrial Average rose 289 points or 0.7%, and the majority of U.S. stocks climbed. But anyone holding an S&P 500 index fund, which is found in many 401(k) accounts, felt the pain because of how influential those tech giants have become on indexes.
The shock to financial markets came from China, where a company called DeepSeek unveiled a large language model that can compete with U.S. giants but at potentially a fraction of the cost. DeepSeek had already hit the top of the chart for free apps on Apple’s App Store by Monday morning, and analysts said such a feat would be particularly impressive given how the U.S. government has restricted Chinese access to top AI chips.
Skepticism, though, remains about how much DeepSeek’s announcement will ultimately shake the economy that’s built around the AI industry, from the chip makers making semiconductors to the utilities hoping to electrify vast data centers gobbling up computing power.
“It remains to be seen if DeepSeek found a way to work around these chip restrictions rules and what chips they ultimately used as there will be many skeptics around this issue given the information is coming from China,” according to Dan Ives, an analyst with Wedbush Securities.
In Amsterdam, Dutch chipmaking equipment company ASML slid 7%. In Tokyo, Japan’s Softbank Group Corp. lost 8.3% to pull closer to where it was before leaping on an announcement trumpeted by the White House that it was joining a partnership to invest up to $500 billion in AI infrastructure.
All the worries sent investors toward bonds, which can be safer investments than any stock. The rush pushed the yield of the 10-year Treasury down to 4.52% from 4.62% late Friday.
It’s a sharp turnaround for the AI winners, which had soared in recent years on hopes that all the investment pouring in would remake the global economy and deliver gargantuan profits along the way. Such stellar performances also raised criticism that their stock prices had gone too far, too fast.
Before Monday’s drop, which was its worst since the 2020 COVID crash, Nvidia’s stock had soared from less than $20 to more than $140 in less than two years, for example.
It was just on Friday that Meta Platforms CEO Mark Zuckerberg was saying he expects his company to invest up to $65 billion this year and grow its AI teams significantly while talking up a data center in Louisiana that will be so large it could cover a significant part of Manhattan.
A small group of seven such companies has become so dominant that they alone accounted for more than half the S&P 500’s total return last year, according to S&P Dow Jones Indices. They include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Their immense sizes give them huge sway over the S&P 500 and other indexes that give more weight to bigger companies. That’s why many 401(k) holders felt the pain of Nvidia’s drop, even if they didn’t know they owned any Nvidia, so long as they owned a fund that tracks the S&P 500.
All told, the S&P 500 fell 88.96 points to 6,012.28. The Nasdaq composite dropped 612.47 to 19,341.83, and the Dow Jones Industrial Average rose 289.33 to 44,713.58.
Brian Jacobsen, chief economist at Annex Wealth Management, suggested not overreacting to Monday’s sharp swings.
“It is possible that the news out of China could be overstated and then we could see a reversal of the recent market moves,” Jacobsen said. “It is also possible that the news is true, but then that would present new investment opportunities.”
More big swings may be ahead. Apple, Meta Platforms, Microsoft, and Tesla are all on the schedule this upcoming week to report how much profit they made at the end of 2024.
The pressure is on companies to keep delivering strong profits, particularly after a recent jump in Treasury yields. When bonds are paying more in interest, they put downward pressure on stock prices. Yields have been on the rise amid a solid U.S. economy and worries about possibly higher inflation coming from tariffs and other policies favored by President Donald Trump.
So far, big U.S. companies have been reporting better results than analysts expected. AT&T became the latest on Monday, and its stock rose 6.3%.
In stock markets abroad, movements for broad indexes across Europe and Asia weren’t as forceful as for the big U.S. tech stocks. Stocks edged 0.1% lower in Shanghai after a survey of manufacturers showed export orders in China dropping to a five-month low.
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Stockstumbledon Monday after Chinese artificial intelligence startup DeepSeek said its new R1 model could perform advanced AI tasks without the most advanced semiconductor chips, triggering a rethinking about the competitive landscape that had fueled massive gains in some stocks over the past two years.
The Morningstar US Market Index closed 1.45% lower on the day, with the largest losses coming in the large-cap growth category of the Morningstar Style Box, which lost 3.11%. However, it wasn’t all bad news for stocks, as large-cap value names fared much better, posting gains of 1.69%. In fact, some of the biggest tech names avoided the carnage altogether. Both Apple AAPL and Meta Platforms META posted gains on Monday.
Demand for semiconductor chips has sent AI-related stocks soaring, but DeepSeek’s model doesn’t rely as heavily on the kind of new, higher-powered chips that investors have been counting on to fuel demand. Its capabilities “roughly match those of advanced models from OpenAI, Anthropic, and Alphabet GOOGL/GOOG,” explains Morningstar senior equity analyst Dan Romanoff, and boasts “materially lower training costs.” This “raised investor concerns about the necessity of the billions of dollars in capital expenditures that large US tech companies have made (and the billions more they plan to spend) on generative AI.”
Here are five charts that sum up Monday’s market action.
Nvidia Stock Tumbles
A sizeable portion of market losses on Monday were attributable to Nvidia NVDA, the semiconductor giant that has become synonymous with the AI boom. The company’s stock closed nearly 17% lower—a stunning rout for a firm that accounts for roughly 4 percentage points of the Morningstar US Market Index’s 26.9% return over the past year.
Morningstar will maintain its fair value estimate of $130 per share for Nvidia stock, says equity strategist Brian Colello. “Despite DeepSeek’s promise, we doubt the leading cloud vendors and AI builders will pause their plans, although it’s a risk that certainly bears watching. We believe AI GPU demand still exceeds supply, so while slimmer models may enable greater development for the same number of chips, we still think tech firms will continue to buy all the GPUs they can as part of this AI ‘gold rush,’” he explains.
Chipmakers Follow Suit
Shares of other giants in the semiconductor industry also struggled on Monday. Broadcom AVGO, Advanced Micro Devices AMD, Arm Holdings ARM, and Micron Technology MU fell sharply lower after trading relatively flat over the past month.
AI ETFs Were Hit Hard, But Nuclear and Chips Were Hit Harder
The three largest AI ETFs were all down today. The $2.9 billion Global X Artificial Intelligence and Tech ETF AIQ fell 2.7%, the $2.8 billion Global X Robotics & Artificial Intelligence ETF BOTZ slid 4.3%, and the $1.1 billion Robo Global Robotics and Automation ETF ROBO dropped 3.3%.
Hit even harder were the two industries that have risen with the AI boom: nuclear energy and semiconductors. The $1.1 billion VanEck Uranium & Nuclear ETF NLR plummeted 11.1% and the $26 billion VanEck Semiconductor ETF SMH, dropped 9.8%.
Utility Stocks Stumble
Monday’s selloff wasn’t confined to technology and semiconductor giants; utilities also took a hit. Strategists often point to the sector as a beneficiary of the AI boom because of the massive demand for electricity generated by the data centers that power AI computations.
The Morningstar US Utilities Index fell 3.6% on Monday, though some of its constituents saw much bigger losses. Over the past year, the index has returned roughly 40%, compared with about 27% for the stock market as a whole.
Vistra VST saw stunning losses of over 28%, GE Vernova GEV plunged 21.5%, and Constellation Energy CEG plummeted 20.8%. Others, including Southern SO, Duke Energy DUK, and American Electric Power AEP, remained in the green.
Magnificent Seven Divergence
While Nvidia floundered, other members of the “Magnificent Seven”—a cohort of mega-cap technology stocks that have driven the lion’s share of the stock market’s gains over the past two years—fared better.
Shares of Apple closed 3.3% higher on Monday afternoon, while shares of Meta Platforms were up 1.9%. Apple struggled last year amid worries that it had fallen behind the pack in the AI race. Microsoft MSFT, which saw a boost just last week on news of a new AI infrastructure investment from the Trump administration, fell 2.1%. Meanwhile, Alphabet GOOGL/GOOG lost 4.2%.
Romanoff says Morningstar’s analysts will maintain their fair value estimates for Microsoft ($490 per share), Amazon ($200), and Alphabet ($220). He expects these firms to benefit from reduced pricing of AI models like DeepSeek’s over the long run, and he thinks increased spending on AI could create tailwinds for their cloud businesses.
Japanese technology shares fell on Tuesday as a global market rout sparked by the emergence of a low-cost Chinese artificial intelligence model entered day two, with investors questioning the sky-high valuation and dominance of AI bellwethers.
Shares of Nvidia (NVDA.O), opens new tab, the poster child of the AI boom in recent years, dragged U.S. stocks lower, sinking 17% on Monday and wiping $593 billion from the chipmaker's market value, a record one-day loss for any company.
It all stemmed from a free AI assistant launched by Chinese startup DeepSeek last week that the firm said uses less data at a fraction of the cost of services available currently, garnering significant attention worldwide including from OpenAI CEO Sam Altman who called it an "impressive model".
"We will obviously deliver much better models and also it's legit invigorating to have a new competitor!," Altman, the head of the AI firm behind ChatGPT, said, opens new tab in a social media post.
The launch and increasing popularity of DeepSeek spurred investors to dump tech stocks globally, with ripples felt from Tokyo to Amsterdam to Silicon Valley.
The Philadelphia semiconductor index (.SOX), opens new tab tumbled 9.2%, for its deepest percentage drop since March 2020. Tech heavy South Korean and Taiwan markets are closed for Lunar New Year.
The selloff has brought into the spotlight the crowded positioning among investors as well as the extremely high valuation of some of these firms.
"What makes Monday's tech selloff so jarring is that the valuations of many of these AI and tech companies offer no margin of error," said David Bahnsen, chief investment officer at The Bahnsen Group.
"The excessive weighting these tech stocks have in many investor portfolios and the high concentration these tech stocks have in the market indices was a significant and under-appreciated risk issue."
The hype around AI has powered a huge flow of capital into equities in the last 18 months, inflating valuations and lifting stock markets to record highs.
It is not just the chipmakers and tech companies but companies focused on datacentres also taking a hit, with Malaysia's utility conglomerate YTL Power (YTLP.KL), opens new tab down 7.5% on Tuesday, its third session of steep loss.
Jun Rong Yeap, market strategist at IG, said there may be some "sell first, think later" thinking at play, with opinions divided on whether DeepSeek will eventually be the so-called game-changer that reshapes the U.S. AI landscape.
"But if anything, market participants dislike uncertainties and are clearly unwilling to take the risks in the near term."
Little is known about the Hangzhou startup behind DeepSeek, whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, records showed.
Its researchers wrote in a paper last month that the DeepSeek-V3 model, launched on Jan. 10, used Nvidia's lower-capability H800 chips for training, at a cost of less than $6 million.
Charu Chanana, chief investment strategist at Saxo, said the development serves as a reminder that competition in the global AI arena is intensifying and Nvidia may not be in pole position forever.
"By developing cutting-edge AI models with less advanced and more cost-efficient hardware, DeepSeek challenges the heavy investments U.S. tech companies are pouring into high-cost AI infrastructure."
Investor focus will now be on the flurry of tech earnings this week, with executives likely keen to calm frayed nerves.
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