Shocking Chinese AI advancement DeepSeek sends US stocks plunging

Technology giant Nvidia's stock plummeted 17% in a single day, marking the largest single-day drop in U.S. stock market history. This plunge resulted in the company's market capitalization evaporating by nearly $1 trillion, falling from $3.49 trillion at Friday's close to $2.88 trillion.

The primary reason for this significant loss in market value was the release of a ChatGPT-like AI model named R1 by Chinese artificial intelligence company DeepSeek. This model possesses all the common functionalities of an AI program, but operates at a much lower cost than popular models developed by companies like OpenAI, Google, and Meta.

It wasn't just Nvidia that suffered on Wall Street: the Nasdaq Composite fell 3.5%, and the S&P 500 was down 1.8% in afternoon trading; shares of Meta and Google parent Alphabet also experienced sharp declines. Nvidia's competitors Marvell, Broadcom, Micron, and TSMC also saw their stock prices plummet. Furthermore, shares of Oracle, Vertiv, Constellation, NuScale, and other data center companies also declined.

DeepSeek stated that its foundation model only cost $5.6 million in computing power, while American companies often spend hundreds of millions or even billions of dollars on AI technology. Meta stated last week that it will invest more than $65 billion in AI development this year. OpenAI CEO Sam Altman said last year that the AI industry needs trillions of dollars in investment to support the chips needed to develop the power-hungry data centers that drive the industry's complex models.

Mark Andreesen, a supporter of President Donald Trump and one of the world's leading tech investors, called DeepSeek "one of the most stunning and impressive breakthroughs I've ever seen." DeepSeek's disruptive technology has shaken global AI-related stocks. In Amsterdam, shares of Dutch chip manufacturing equipment company ASML fell 7%. In Tokyo, shares of Japan's SoftBank Group fell 8.3%. On Wall Street, Constellation Energy shares fell nearly a fifth, a drop of 19.9%.

All of these concerns prompted investors to turn to bonds, which are considered safer investments than stocks. This influx pushed the yield on the 10-year U.S. Treasury note down from 4.62% late Friday to 4.54%. The stunning achievement of a relatively unknown AI startup is even more shocking given that the U.S. has for years restricted the supply of high-performance AI chips to China for national security reasons. This implies that DeepSeek was able to achieve its low-cost model on AI chips with lower computing power.

The tech sector's turmoil has also spread to the broader stock market, as tech stocks hold a significant weight in the market. According to Truist analyst Keith Lerner, tech stocks account for approximately 45% of the S&P 500. Lerner stated, "The key issue is that the U.S. stock market's outperformance has been driven by tech stocks and the U.S. companies' lead in artificial intelligence. The release of the DeepSeek model is causing investors to question the lead of U.S. companies, and whether their massive spending on AI will yield profits (or is overspending)."

This week will mark the beginning of a series of tech companies releasing their earnings reports, and their reactions to the shock of DeepSeek may cause market volatility in the coming days and weeks. In the meantime, investors are closely watching Chinese AI companies. Saxo Chief Investment Strategist Charu Chanana stated, "Due to geopolitical concerns and weak global demand, Chinese tech companies, including new entrants like DeepSeek, are trading at significant valuation discounts. The rise of DeepSeek may reignite investor interest in undervalued Chinese AI companies, thus providing another growth story."

Furthermore, this news has also triggered a huge shift in Wall Street's investment in non-tech companies. As AI data centers require massive amounts of electricity, the stock prices of energy companies have soared in recent years. However, on Monday, their stock prices all plummeted. Constellation Energy, which planned to restart the Three Mile Island nuclear power plant to power AI, plunged nearly 20% on Monday. Competitor Vistra fell 26%, and General Electric Vernova fell 19%. Natural gas futures for power generation fell 9%, and oil fell more than 1%. Bitcoin and other cryptocurrencies also fell sharply.

Although DeepSeek's achievement is stunning, it may not be enough to offset the years of progress the U.S. has made in the field of AI. Moreover, it is unlikely that a large number of customers will switch to the Chinese startup. Therefore, the market sell-off may be somewhat excessive, or investors may just be looking for an excuse to sell. Third Seven Capital market strategist Michael Block stated, "Whether the threat from DeepSeek is real, time will tell—the technological competition is on, and how Western giants respond and evolve. The market has been too complacent about the start of the Trump 2.0 era and may have been looking for an excuse for a pullback—and they found a great one here."

The industry also believes the company's claims of such low costs. No one is really disputing it, but the market's panic hinges on the authenticity of a relatively unknown company. While the cost-saving achievement may be significant, the R1 model is a competitor to ChatGPT, a large language model focused on consumers. It has yet to prove its ability to handle the ambitious AI capabilities that some industries require, which demand massive infrastructure investment.

Giuseppe Sette, President of AI market research firm Reflexivity, stated, "The U.S. remains the most promising 'home field' due to its rich talent and capital base, and we expect to see the emergence of the first self-improving AI here."