DeepSeek: Shocking Chinese AI advance sends US stocks tumbling

CNN
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US stocks were set for a steep sell-off on Monday morning after a surprise advance by a Chinese artificial intelligence company, DeepSeek, threatened the aura of invincibility surrounding America’s technology industry.

DeepSeeka one-year-old startup, showed off an amazing feature last week: It presented a ChatGPT-like AI model called R1, which has all the familiar capabilities and works at a fraction of the cost of OpenAI’s, Google’s, or Meta’s popular AI models . The company said it had spent just $5.6 million to train its latest AI model, compared to the hundreds of millions or billions of dollars American companies spend on their AI technologies.

That sent shockwaves through the tech sector on Monday. Meta said last week that it would spend up to $65 billion this year on AI development. Sam Altman, CEO of OpenAI, said last year that the AI ​​industry would need it trillions of dollars in investments to support the development of in-demand chips needed to power the power-hungry data centers that run the sector’s complex models.

Mark Andreessen, a Trump supporter and one of the world’s leading technology investors, called DeepSeek “one of the most amazing and impressive breakthroughs I’ve ever seen,” in a post on X.

The stunning performance by a relatively unknown AI startup becomes even more shocking when you consider that the United States has worked for years to limit the supply of high-powered AI chips to China, citing national security concerns. This means that DeepSeek was able to achieve its low-cost model on underpowered AI chips.

US tech stocks took a hammering on Monday morning. Nvidia ( NVDA ), the leading AI chip supplier whose stock has more than doubled in each of the past two years, fell 12% in premarket trading. Meta ( META ) and Alphabet ( GOOGL ), Google’s parent company, also fell sharply, as did Marvell, Broadcom, Palantir, Oracle and many other tech giants.

That dragged down the broader stock market because technology stocks make up a significant portion of the market — tech makes up about 45% of the S&P 500, according to Keith Lerner, an analyst at Truist. S&P 500 futures were on track to drop 2.4% at the open, and the tech-heavy Nasdaq was set to open 4.2% lower. The Nasdaq hasn’t closed 4% lower since September 2022. The Dow was on pace to open about 400 points, or 0.9%, lower.

“The bottom line is that the US outperformance has been driven by technology and the head start that US companies have in artificial intelligence,” Lerner said. “The rollout of the DeepSeek model has investors questioning the head start that U.S. companies have and how much is being spent and whether that spending will lead to profits (or overspending).”

A number of tech companies start reporting earnings this week, so their response to the DeepSeek stunner could lead to tumultuous market moves in the coming days and weeks.

But one achievement, albeit a smashing one, may not be enough to reverse years of progress in American AI leadership. And a massive customer switch to a Chinese startup is unlikely. So the market sell-off may be a bit exaggerated – or perhaps investors were looking for an excuse to sell.

“Time will tell if the DeepSeek threat is real – the race is on to see what technology works and how the major Western players will respond and evolve,” said Michael Block, market strategist at Third Seven Capital. “Markets had gotten too complacent at the start of the Trump 2.0 era and may have been looking for an excuse to pull back — and they got a great one here.”