Chinese AI startup DeepSeek's low-cost, high-performing AI model R1 has rattled U.S. tech markets, raising questions about America's dominance in the field. The company's achievement, coming amidst U.S. efforts to restrict chip supplies to China, has sparked investor concerns and triggered a sell-off in top tech stocks.
U.S. stocks suffered a sharp decline on Monday morning following a groundbreaking advancement from a Chinese artificial intelligence firm, DeepSeek. The emergence of DeepSeek, a startup just one year old, posed a challenge to the dominance of America's technology sector. Last week, DeepSeek unveiled R1, an AI model comparable to ChatGPT, boasting similar capabilities at a fraction of the cost incurred by OpenAI, Google, or Meta's renowned AI models. DeepSeek claimed to have invested only $5.
6 million in computing power for its base model, a stark contrast to the hundreds of millions or billions of dollars expended by U.S. companies on their AI technologies.The S&P 500 index plummeted by 1.4%, while the tech-heavy Nasdaq composite index plunged by 2.3%. The Dow Jones Industrial Average remained relatively unchanged. Although markets witnessed a deeper sell-off earlier in the session, investors may have perceived the decline as somewhat overstated. Meta, for instance, recently announced its intention to allocate over $65 billion this year for AI development. Sam Altman, CEO of OpenAI, asserted last year that the AI industry would require trillions of dollars in investment to support the development of high-performance chips essential for powering the energy-intensive data centers that underpin the sector's complex models.Marc Andreessen, a prominent tech investor and supporter of former President Donald Trump, hailed DeepSeek as 'one of the most amazing and impressive breakthroughs I've ever seen' in a post on X, formerly known as Twitter. The remarkable achievement of this relatively obscure AI startup is even more astonishing considering that the United States has, for years, endeavored to restrict the supply of high-performance AI chips to China, citing national security concerns. This implies that DeepSeek managed to develop its cost-effective model on less powerful AI chips. U.S. tech stocks were heavily impacted on Monday, with Nvidia (NVDA), the leading supplier of AI chips, experiencing a 12% decline. Nvidia's stock had more than doubled in each of the past two years. Meta (META) and Alphabet (GOOGL), Google's parent company, also saw significant drops. Competitors of Nvidia, including Marvell, Broadcom, Micron, and TSMC, all experienced sharp declines as well. Oracle (ORCL), Vertiv, Constellation, NuScale, and other data center companies also tumbled.This downward trend dragged down the broader stock market, as tech stocks constitute a substantial portion of the market - approximately 45% of the S&P 500, according to Keith Lerner, an analyst at Truist. 'The bottom line is that U.S. outperformance has been driven by tech and the lead that U.S. companies have in AI,' Lerner stated. 'The DeepSeek model rollout is prompting investors to question the lead that U.S. companies have and how much is being spent and whether that spending will translate into profits (or overspending).'This week marks the beginning of a series of tech companies reporting earnings, and their response to DeepSeek's breakthrough could trigger substantial market fluctuations in the coming days and weeks. Meanwhile, investors are scrutinizing Chinese AI companies more intently. 'Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand,' said Charu Chanana, chief investment strategist at Saxo. 'DeepSeek's rise could ignite renewed investor interest in undervalued Chinese AI companies, providing an alternative growth narrative.
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