DeepSeek's AI breakthrough rattles US markets and tech giants
The Chinese company DeepSeek caused a major stir on the stock exchange. Investors reacted nervously to the information that the Chinese startup had developed a competitive artificial intelligence model for a fraction of the billions spent by Silicon Valley.
The Chinese startup DeepSeek reportedly developed an artificial intelligence model that poses a serious threat to American dominance in the field of AI. Shortly after its debut, the application became the most downloaded in the United States in the App Store, pushing OpenAI's ChatGPT from the top spot.
The startup from China has released a free AI-powered assistant, which, according to the company, uses cheaper chips and a smaller amount of data. This challenges the common belief in the financial markets that artificial intelligence will drive demand throughout the supply chain from chip manufacturers to data centres.
This caused a real shake-up on the American stock exchange. The S&P 500 fell by 1.46% at the end of the day to 6,012.28 points. The Nasdaq Composite declined by 3.07% to 19,341.83 points.
Why are investors concerned?
Microsoft is set to allocate £63 billion for investments in 2025, and Meta has revealed plans to invest between £5 billion and £51 billion. Against the backdrop of these substantial AI investments in the U.S., DeepSeek's advanced yet cost-effective AI model has demonstrated remarkable innovation and success. This has led investors to question whether the AI investment cycle may be overestimated and whether future resource allocation could be optimized, according to a report by JPMorgan analyst Sandeep Deshpande.
DeepSeek claims that the initial version of its large language model, launched at the end of December, cost less than $6 million. Wall Street questions this figure, but the startup's claims raise concerns that large AI models could be built with much smaller investments.
Nvidia, the darling of the AI-related bull market, fell more than 18% on Monday. Broadcom, AMD, Microsoft, Amazon, and Palantir also declined significantly.
The buzz around artificial intelligence has caused a huge influx of capital into the stock market over the past 18 months, driving valuations to new heights.
- If it’s true that DeepSeek is the proverbial 'better mousetrap,' that could disrupt the entire AI narrative that has helped drive the markets over the last two years - said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin, cited by Reuters.
- It could mean less demand for chips, less need for a massive buildout of power production to fuel the models, and less need for largescale datacenters. However, it could also mean that AI becomes more accessible and help kickstart the development of a wide array of useful applications, he added.
Donald Trump announced an investment plan
Even on Wednesday, American stocks related to artificial intelligence rose after former President Donald Trump announced an investment plan in AI infrastructure valued at $500 billion through a joint venture known as Stargate.
Since then, SoftBank has announced a commitment of $19 billion to help fund Stargate. Other sponsors of this venture include OpenAI and Oracle.
The "Financial Times" points out that the current sell-off in the technology sector, triggered by the advancement in artificial intelligence by the Chinese startup DeepSeek, serves as a reminder of the risks of a concentrated stock market.
Currently, the top 10 companies account for nearly two-thirds of the power of the S&P 500 index. In the opinion of the "FT," such a concentration is unprecedented in modern times.
Giants to showcase results. The market is waiting
Investors are awaiting the release of fourth-quarter results this week by a large portion of the "magnificent seven" group. Meta, Microsoft, Tesla, and Apple will showcase their achievements.
Sales of new homes in the U.S. in December amounted to 698,000 annually, compared to the expected 672,000. The previous month recorded sales of 674,000, after a revision from 664,000.
On a month-to-month basis, sales increased by 3.6% compared to a 9.6% increase month-to-month the previous month, after a revision from +5.9%. Analysts expected +2.4%.
On the oil market, February WTI contracts declined by 2.18% to $97.45 per barrel, and March Brent futures decreased by 2.04% to $102.60 per barrel.
