US stocks have dropped sharply after a surprise advancement from a Chinese artificial intelligence company, DeepSeek, threatened the aura of invincibility surrounding America's technology industry.DeepSeek, a one-year-old start-up, revealed a stunning capability last week: It presented a ChatGPT-like Artificial Intelligence model called R1, which has all the familiar abilities, operating at a fraction of the cost of OpenAI's, Google's or Meta's popular AI models.It triggered a bloodbath on Wall Street; Nvidia slumped 17.4 per cent, dragging the Nasdaq composite down 3.5 per cent; the S&P 500 is down 1.8 per cent in afternoon trade; Meta and Alphabet, Google's parent company, were also down sharply.
This photo illustration shows the DeepSeek app on a mobile phone in Beijing. (Greg Baker/AFP/Getty Images via CNN Newsource)Nvidia competitors Marvell, Broadcom, Micron and TSMC all fell sharply, too. Oracle, Vertiv, Constellation, NuScale and other data centre companies tumbled.DeepSeek said it had spent just $US5.6 million ($8.9 million) on computing power for its base model, compared with the hundreds of millions or billions of dollars US companies spend on their AI technologies.Meta last week said it would spend upward of $US65 billion ($103.5 billion) this year on AI development. Sam Altman, CEO of OpenAI, last year said the AI industry would need trillions of dollars in investment to support the development of in-demand chips needed to power the electricity-hungry data centres that run the sector's complex models.
Nvidia, the leading supplier of AI chips, whose stock more than doubled in each of the past two years, fell 17 per cent. (AP)Marc Andreessen, a supporter of President Donald Trump and one of the world's leading tech investors, called DeepSeek "one of the most amazing and impressive breakthroughs I've ever seen", in a post on X.DeepSeek's disruption nevertheless rocked AI-related stocks worldwide.In Amsterdam, Dutch chipmaking equipment company ASML slid 7 per cent. In Tokyo, Japan's Softbank Group Corp. lost 8.3 per cent 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 $US500 billion in AI infrastructure.And on Wall Street, shares of Constellation Energy lost nearly a fifth of its value, 19.9 per cent. The company has said it would restart the shuttered Three Mile Island nuclear power plant to supply power for data centers for Microsoft.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 4.54 per cent from 4.62 per cent late Friday.The stunning achievement from a relatively unknown AI start-up becomes even more shocking when considering that the US for years has worked to restrict the supply of high-power AI chips to China, citing national security concerns. That means DeepSeek was able to achieve its low-cost model on under-powered AI chips.The tech sector tremors have also hit the broader stock market, because tech stocks make up a significant chunk of the market — tech constitutes about 45 per cent of the S&P 500, according to Keith Lerner, analyst at Truist."The bottom line is the US outperformance has been driven by tech and the lead that US companies have in AI," Lerner said."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 kicks off a series of tech companies reporting earnings, so their response to the DeepSeek stunner could lead to tumultuous market movements in the days and weeks to come. In the meantime, investors are taking a closer look at Chinese AI companies."Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand," said Charu Chanana, chief investment strategist at Saxo."DeepSeek's rise could spark renewed investor interest in undervalued Chinese AI companies, providing an alternative growth story."
A massive rotation out of AI bets
The news also sparked a huge change in investments in non-technology companies on Wall Street.Energy companies had been traded up significantly higher in recent years because of the massive amounts of electricity needed to power AI data centres. But they all plummeted on Monday. Constellation Energy, the company behind the planned revival of the Three Mile Island nuclear plant for powering AI, fell nearly 20 per cent on Monday. Competitors like Vistra fell 26 per cent and GE Vernova was down 19 per cent.Futures for natural gas, used to power electricity generators, tumbled 9 per cent. Oil fell more than 1 per cent.Bitcoin and other cryptocurrencies also tumbled.
One expert posited that "markets had gotten too complacent on the beginning of the Trump 2.0 era and may have been looking for an excuse to pull back". (AP Photo/Seth Wenig)
Is this for real?
One achievement, albeit a gobsmacking one, may not be enough to counter years of progress in American AI leadership. And a massive customer shift to a Chinese startup is unlikely. So the market selloff may be a bit overdone — or perhaps investors were looking for an excuse to sell."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," said Michael Block, market strategist at Third Seven Capital."Markets had gotten too complacent on the beginning of the Trump 2.0 era and may have been looking for an excuse to pull back — and they got a great one here."The industry is also taking the company at its word that the cost was so low. No one is really disputing it, but the market freak-out hinges on the truthfulness of a single and relatively unknown company.Although the cost-saving achievement may be significant, the R1 model is a ChatGPT competitor – a consumer-focused large-language model. It hasn't yet proven it can handle some of the massively ambitious AI capabilities for industries that – for now – still require tremendous infrastructure investments."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," said Giuseppe Sette, President of AI market research firm Reflexivity.
