The emergence of DeepSeek, a Chinese company with a ChatGPT-like AI model, has triggered a market downturn, particularly impacting US tech giants. Skepticism remains about the long-term impact of DeepSeek's announcement, but the immediate market reaction highlights the risks of concentration risk in stock investing.
Wall Street experienced a significant downturn on Monday, January 27, 2025, as a Chinese AI company, DeepSeek, announced the development of a ChatGPT-like model named R1. This new AI model, reportedly capable of competing with US giants like OpenAI at a fraction of the cost, sent shockwaves through the market, particularly impacting companies heavily involved in the AI sector. The S&P 500 plunged 1.9%, marking its worst day in over a month, while the Nasdaq composite dropped 3.
3%, dragged down by a 17.6% decline in Nvidia's stock. In contrast, the Dow Jones Industrial Average, with less emphasis on tech, fell only 0.1%. DeepSeek's app swiftly climbed to the top of Apple's App Store, raising eyebrows given the US government's restrictions on Chinese access to leading AI chips. Skepticism, however, lingers regarding the extent to which DeepSeek's announcement will disrupt the AI supply chain. Analysts like Dan Ives from Wedbush Securities question whether DeepSeek bypassed chip restrictions and what specific chips were utilized, noting the need for verification given the source of the information. The market's reaction was swift and widespread. Dutch chip supplier ASML's shares dipped 7.4%, while Japan's Softbank Group Corp. lost 8.3% after earlier soaring on an announcement of a $500 billion AI infrastructure partnership with the White House. Constellation Energy, planning to restart the Three Mile Island nuclear power plant to supply data centers for Microsoft, saw its value plummet by almost 20%. This widespread unease prompted investors to shift towards safer havens like bonds, pushing down the yield of the 10-year Treasury. This dramatic shift underscores the risks associated with over-reliance on a few high-performing stocks, a phenomenon known as 'concentration risk.' As Brian Jacobsen, chief economist at Annex Wealth Management, points out, although recent market swings might seem alarming, they could present new investment opportunities. The coming week will likely see further volatility as Apple, Meta Platforms, Microsoft, and Tesla report their 2024 earnings
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