DeepSeek Sparks AI stock Selloff
Global investors sold off tech stocks on Monday, concerned that the emergence of a low-cost Chinese artificial intelligence model could threaten the dominance of AI leaders like Nvidia.
This selloff wiped out $593 billion of Nvidia's market value, marking the largest one-day loss for any company on Wall Street.
As a result, the tech-heavy Nasdaq dropped 3.1% on Monday, with Nvidia being the biggest contributor to the decline. Its shares fell nearly 17%, resulting in a record one-day loss in market capitalization for a Wall Street stock, according to LSEG data.
Nvidia's market-cap loss on Monday was more than double its previous record, set last September.
Other notable decliners in the Nasdaq included chipmaker Broadcom Inc, which dropped 17.4%, followed by ChatGPT backer Microsoft, which fell 2.1%, and Google parent Alphabet, which ended down 4.2%.
The Philadelphia Semiconductor Index (.SOX) plummeted 9.2%, its biggest percentage drop since March 2020. Marvell Technology (MRVL.O) was the largest decliner within the index, tumbling 19.1%.
U.S. equity declines were part of a broader selloff that began in Asia, with Japan's SoftBank Group (9984.T) finishing down 8.3%, and spread to Europe, where ASML (ASML.AS) fell 7%.
"If DeepSeek is truly the 'better mousetrap,' it could disrupt the entire AI narrative that has fueled the markets over the last two years," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
"It could mean reduced demand for chips, less need for power production to fuel models, and fewer large-scale data centers."
The excitement surrounding AI has driven significant capital inflows into equities over the last 18 months, inflating valuations and pushing stock markets to new highs.
As recently as Wednesday, U.S. AI-related stocks saw a sharp rally after former President Donald Trump announced a $500 billion private-sector AI infrastructure investment plan via a joint venture called Stargate.
Following that, SoftBank pledged $19 billion to fund the Stargate venture, which also counts OpenAI and Oracle among its backers. Oracle shares fell 13.8% on Monday.
Trump also suggested that DeepSeek could be a "wake-up call" and a potentially positive development for the sector.
In their flight from risk on Monday, investors flocked to safe-haven government bonds and currencies. The U.S. Treasury 10-year yield fell to 4.53%, while Japan's yen and the Swiss franc gained strength against the U.S. dollar.
The increased volatility in tech stocks is likely to prompt banks to reassess their risk management strategies, potentially holding fewer shares or adjusting positions as clients unwind their holdings, according to a trading executive who requested anonymity.
DeepSeek: The 'Sputnik Moment'
After the release of Baidu’s first Chinese ChatGPT equivalent, there was widespread disappointment in China regarding the gap in AI capabilities between U.S. and Chinese firms. However, the impressive quality and cost-efficiency of DeepSeek's models have changed this perception, with Silicon Valley executives praising the DeepSeek-V3 and DeepSeek-R1 models.
Little is known about the Hangzhou-based startup behind DeepSeek, whose majority shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, according to company records.
Researchers behind DeepSeek published a paper last month detailing that the DeepSeek-V3 model, launched on January 10, was trained using Nvidia's lower-capability H800 chips, costing less than $6 million to develop.
The DeepSeek-R1 model, released last week, is reportedly 20 to 50 times cheaper to operate than OpenAI’s GPT-3 model, depending on the task, according to a post on DeepSeek’s official WeChat account.
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