US stocks dropped sharply Monday morning after a surprise advancement from a Chinese artificial intelligence company, DeepSeek, threatened the aura of invincibility surrounding America’s technology industry.
DeepSeek, a one-year-old startup, revealed a stunning capability: It presented a ChatGPT-like AI model called R1, which has all the familiar abilities, operating at a fraction of the cost of OpenAI’s, Google’s or Meta’s popular AI models. The company said it had spent just $5.6 million training its newest AI model, compared with the hundreds of millions or billions of dollars US companies spend on their AI technologies.
That sent shockwaves through markets, in particular the tech sector, on Monday. The Dow opened about 369 points, or 0.8%, lower. The S&P 500 fell by 2% and the tech-heavy Nasdaq plunged by 3.6%. The Nasdaq hasn’t closed 4% lower since September 2022.
Meta last week said it would spend upward of $65 billion this year on AI development. The AI industry would need trillions of dollars in investment to support the development of in-demand chips needed to power the electricity-hungry data centers that run the sector’s complex models.
The stunning achievement from a relatively unknown AI startup becomes even more shocking when considering that the United States for years has worked to restrict the supply of high-power AI chips to China, citing national security concerns. That means DeepSeek was able to achieve its low-cost model on under-powered AI chips.
US tech stocks got hammered Monday morning. Nvidia, the leading supplier of AI chips, whose stock more than doubled in each of the past two years, fell 12%. Meta and Alphabet, Google’s parent company, were also down sharply, as were Marvell, Broadcom, Palantir, Oracle and many other tech giants.
That dragged down the broader stock market, because tech stocks make up a significant chunk of the market — tech constitutes about 45% of the S&P 500. The US outperformance has been driven by tech and the lead that US companies have in AI. The DeepSeek model rollout is leading investors to question the lead that US companies have and how much is being spent and whether that spending will lead to profits.
This week kicks off a series of tech companies reporting earnings, so their response to the DeepSeek stunner could lead to tumultuous market movements in the days and weeks to come. But one achievement, albeit a stunning one, may not be enough to counter years of progress in American AI leadership. And a massive customer shift to a Chinese startup is unlikely. So the market selloff may be a bit overdone — or perhaps investors were looking for an excuse to sell.
Time will tell if the DeepSeek threat is real — the race is on as to what technology works and how the big Western players will respond and evolve. Markets had gotten too complacent and may have been looking for an excuse to pull back — and they got a great one here.
