Investors made a quick exit from a host of technology stocks from Tokyo to New York today as the emergence of a low-cost Chinese artificial intelligence model challenged the dominance of current AI leaders such as Nvidia.
Raising questions about the level of investment needed for AI, startup DeepSeek launched a free AI assistant last week that it says uses less data at a fraction of the cost of incumbent services.
And by Monday DeepSeek's assistant hadovertaken US rival ChatGPT in downloads from Apple's app store.
The news led Nasdaq to open down more than 3%. The tech-heavy index has since pared losses but was still down 2.9% at midday, with leading AI chipmaker Nvidia its biggest drag with a loss of more than 15%.
The Nasdaq's next biggest drag was chip maker Broadcom Inc, down 15%, followed by Microsoft, off 3.7%, and Google parent Alphabet, which fell 2.7%.
The Philadelphia semiconductor index tumbled 7.9%, eyeing its biggest percentage drop since March 2020.
Their declines followed a sell-off that started in Asia, with Japan's SoftBank Group finishing down 8.3%, and moved through Europe where ASML fell 7.6%.
"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,
"It could mean less demand for chips, less need for a massive build-out of power production to fuel the models, and less need for large-scale data centers. However, it could also mean that AI becomes more accessible and help kickstart the development of a wide array of useful applications," Jacobsen said.
The hype around AI has powered a huge inflow of capital into the equity markets in the last 18 months, as investors bought into the technology, which inflated company valuations and lifted stock markets to new highs.
On Wednesday US AI-related stocks rallied after President Donald Trump announced a private-sector plan for what he said would be a $500 billion investment in AI infrastructure through a joint venture known as Stargate.
Since then SoftBankhas announced a $19 billion commitment to help fund the Stargate joint venture with companies including OpenAI and Oracle, whose shares were down 7.8% on Monday.
US-traded shares in ASML, which counts Taiwan's TSMC, Intel and Samsung as its customers, dropped more than 6%. In Europe energy technology company Siemens Energy lost 19%.
Little is known about the small Hangzhou startup behind DeepSeek. Its researchers wrote in a paper last month the DeepSeek-V3 model, launched on January 10, used Nvidia's chips for training, spending less than $6 million - the figure referenced by Pictet's Withaar.
H800 chips are not top of the line. Initially developed as a reduced-capability product to get around curbs on sales to China, they were subsequently banned by US sanctions.
'Sputnik moment'
Marc Andreessen, the Silicon Valley venture capitalist, said in a post on X on Sunday that DeepSeek's R1 model was AI's "Sputnik moment," referencing the former Soviet Union's launch of a satellite that marked the start of the space race in the late 1950s.
"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen — and as open source, a profound gift to the world," he said in a separate post.
Given the volatility in equities, investors sought out safe-havens such as US Treasuries. This pushed 10-year yields down to 4.55% while currencies like Japan's yen and the Swiss franc rallied against the dollar.
Big Tech has ramped up spending on developing AI capabilities and optimism over the possible returns has driven stock valuations sky-high.
Shares in Nvidia are down more than 7% for the year to date but the stock rose 171% in 2024 and 239% in 2023to trades at 56 times the value of its earnings.
In comparison the Nasdaq trades at a multiple of 16 to the value of its constituents' earnings, LSEG data showed.
Among other stocks, Vertiv Holdings, which builds data centre infrastructure, slumped 27%.
Power utilities, expected to benefit from a surge in demand from power-hungry data centers needed to develop AI technology, also tumbled. Vistra shares were down 24.4% while Constellation Energy shares were off more than 18% and NRG Energy fell 13%.
