US Tech Stocks Plummet After Chinese AI Startup's Breakthrough

Investors wait for China's stock market to open in front of an electronic board at a brokerage house in Beijing,

US stocks experienced a significant drop on Monday morning following a surprising development from a Chinese artificial intelligence company, DeepSeek, which posed a challenge to the dominance of America's technology industry. DeepSeek, a young startup, unveiled an AI model named R1, similar to ChatGPT, boasting familiar capabilities at a fraction of the cost of established US AI models. The company's claim of spending only $5.6 million on computing power for its base model, in contrast to the billions typically invested by US firms, rattled the markets, particularly the tech sector.

The S&P 500 declined by 1.4%, while the Nasdaq, heavily weighted with tech stocks, plummeted by 2.3%. Meta, OpenAI, and Google's parent company, Alphabet, all saw sharp declines in their stock prices. Nvidia, a leading AI chip supplier, witnessed a 12% drop, impacting related companies like Marvell, Broadcom, and Micron.

The market reaction reflects concerns about the US tech industry's lead in AI being challenged by DeepSeek's breakthrough. The news prompted investors to question the level of spending by US companies and its potential impact on profitability. The upcoming earnings reports from tech companies will likely influence market movements in the coming days.

DeepSeek's cost-effective AI model caused market turmoil.

DeepSeek's AI model R1 threatens US tech industry dominance.

S&P 500 fell by 1.4%, Nasdaq by 2.3% due to tech stock declines.

Additionally, the rise of DeepSeek has sparked interest in undervalued Chinese AI firms among investors, potentially shifting focus away from US tech stocks. The impact extended beyond tech, affecting energy companies that supply power to AI data centers. Futures for natural gas and oil prices dropped, while cryptocurrencies also experienced a decline.

Despite DeepSeek's cost-saving achievement with the R1 model, doubts remain about its ability to handle complex AI tasks that require substantial infrastructure. The US, with its talent and capital resources, is still seen as the primary hub for groundbreaking AI advancements. The market's reaction to DeepSeek's emergence underscores the ongoing competition in the AI sector and the need for Western players to adapt and innovate.