DeepSeek's announcement of a highly effective AI model built with less powerful chips than those used by US companies triggered a sell-off in the tech sector, particularly in Nvidia, raising questions about the future of AI investments.
A report from today's CNBC Daily Open, our international markets newsletter, brings investors up to speed on everything they need to know, no matter where they are. The tech sector, particularly the stock market's AI-related plays, faced a significant downturn on Monday, driven by DeepSeek's claims that highly effective AI models can be built with less powerful and energy-consuming chips than those currently used by US companies like Nvidia .
DeepSeek's announcement, which rivals OpenAI's ChatGPT and utilizes less powerful chips than those employed by US AI firms, sparked fears that the massive investments poured into AI by US companies might be unwarranted and a bubble waiting to burst. The company’s model, built with less powerful chips than those used by US AI firms, according to estimates by Jefferies analysts, raised concerns about the actual energy consumption of AI applications. This resulted in a broad retreat across semiconductor and AI-related stocks, though the Dow Jones Industrial Average managed to advance. The pan-European Stoxx 600 index ticked down 0.07%, while Nvidia's slump was described as an 'overreaction' on a scale close to the 2020 pandemic-sparked sell-off by Tom Lee, head of research at Fundstrat Global Advisors.Nvidia's rout, triggered by DeepSeek-induced worries that AI models don't actually need billions of dollars' worth of expensive chips, is deep and scary. There's no other way of putting it. Prior to Monday, the chipmaker was the most valuable publicly traded company. After the sell-off, which wiped close to $600 billion in Nvidia's market capitalization, the company dropped to third place, behind Microsoft and Apple. To put that tectonic shift into context, Nvidia's plummet in market cap is larger than the entire market value of Meta Platforms. And it matters for investors because Nvidia, in all likelihood, holds a place in their portfolios, considering how much the stock market has relied on the chipmaker for its gains the past two years. Even if investors, for some reason, are not exposed to Nvidia, its shares are among the top 15 holdings of 469 exchange traded funds, according to Bloomberg.Nvidia aside, other AI-adjacent plays fell steeply, causing the tech-heavy Nasdaq Composite to slide 3.07%. The S&P 500 lost 1.46%. However, the Dow Jones Industrial Average, which climbed 0.65%, was somewhat shielded from the Monday bloodbath by gains in Apple, Johnson & Johnson and Travelers. 'It's a good example of selling first and asking questions later, and investors sort of feeling that valuations are a bit stretched for technology in general and for semiconductors in particular,' said Sam Stovall, chief investment strategist at CFRA Research. The Cboe Volatility Index (VIX) — which measures the strength of 30-day price changes of the S&P and is hence seen as Wall Street's fear gauge — jumped by 20.5% on Monday, though it managed to dip from the 45% increase earlier in the day. That said, there were still pockets in the market where stocks rose, suggesting that investors are not bailing out of stocks necessarily, but are rotating into the defensive areas,' as Stovall put it.Healthcare stocks, for example, rose on the prospect that AI costs could go down and expand their margins, according to John Belton, portfolio manager at Gabelli Funds. In other words, DeepSeek isn't proving that AI is a fantastical hole into which investors and companies have been pouring money. On the contrary, it suggests that AI is more accessible and affordable than thought — if DeepSeek's claims about its low costs are proven true, investors have to get used to a different way of playing AI. — CNBC's Lisa Kailai Han, Fred Imbert, Pia Singh, Jesse Pound, Michelle Fox, Nicholas Wells, Adrian van Hauwermeiren, Scott Schnipper contributed to this report
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