DeepSeek Triggers Tech Selloffs

The tech-heavy Nasdaq (NQ) tumbled 3.1% on Monday, 27 January, following the release of super-cheap Chinese AI model DeepSeek. 

Fears that the low-cost, low-data-intensive model will reduce demand for data centre chips rattled markets as the free AI assistant dampened optimism around AI-led growth seen in 2024.

US chipmakers led the declines, with prominent AI player Nvidia (NVDA) plunging a record-breaking one-day 17%, AI-server maker Dell (DELL) losing 8.7%, and power company Vistra crashing 28.3%.

Despite some critics believing the Chinese startup might have left out “substantial” capital expenditures for the model’s development, DeepSeek beat OpenAI’s ChatGPT to the top of the App Store on Monday after stunning Silicon Valley with its capabilities. Yet, several Wall Street analysts expect DeepSeek to expand the use of AI, calling yesterday’s event “overblown.” 

DeepSeek Triggers Selloffs

Some industry experts believe that DeepSeek is better than OpenAI’s leader, ChatGPT. For one, it is an open-source AI assistant offered to the masses for free, and it runs locally, which means personal data is not shared with anyone. Most importantly, DeepSeek’s R1 AI can train models at just $0.14 for a million tokens at the API level, a massive cost reduction from OpenAI’s latest o1 model, which costs $7.50 for the same amount of tokens. (Source: Mashable)  

Running only at a fraction of the capital-intensive cost of the US rival backed by Microsoft (MSFT), DeepSeek battered optimism of AI leadership in the US, triggering a tech sell-off. This is because some tech stocks have been tearing higher over the past two years, led by AI, with DeepSeek now raising questions about overspending and profit generation as the earnings season approaches full swing.

The news arrived at a time when new US President Donald Trump recently announced “Stargate,” a $500 billion AI infrastructure project in the US aimed at driving demand for data centres and creating around 100,000 jobs. 

The high-stakes venture involving Nvidia and British chipmaker ARM (ARM), among other players, was fed into markets as "a resounding declaration of confidence in America's potential under a new president." At the peak of the enthusiasm, DeepSeek caught investors off-guard. 

Nvidia Tumbles, Apple Rises 

AI darling Nvidia was one of the biggest decliners on Monday, weighed down by unease over demand concerns for Nvidia’s advanced, high-margin H100 AI chips. DeepSeek’s AI model was allegedly built and trained using Nvidia’s less powerful H800 chips despite export restrictions. 

The startup also claimed that training its R1 model cost a mere $5.6 million over the two-month training period, while US rivals spend hundreds of billions at each turn. For context, just in Q4 of last year, AI-related startups in the US received more than $100 billion in funding, with OpenAI alone securing $6.6 billion to a valuation of $157 billion.

The substantial rotation out of tech and the S&P 500 (ES), which has a heavy tech weighing (approximately 45%), however, led the defensive index, Dow Jones (YM), higher. The index was supported by a rise in Apple (AAPL), owing to the company’s lack of investment in AI. In fact, among the Magnificent Seven group of stocks, Apple was the only gainer on Monday. Apple, a day after Meta (META), Microsoft, and Tesla (TSLA) report this Wednesday, will release its Q4 earnings on Thursday.

Looking Ahead

During a big week for earnings, some analysts believe DeepSeek’s sudden success could weigh on earnings. The Magnificent Seven have invested substantial sums of money in artificial intelligence to win the AI battle with expensive services at the cost of the consumer. On the other hand, guiding lower capital expenses may suggest a boost in profits. However, as DeepSeek lags behind artificial general intelligence (AGI), which China has no infrastructure to support, some analysts still believe Mag7 has yet to benefit in the long term.

DeepSeek’s sudden popularity may have been described as a technological “Sputnik moment,” but it still resulted in a $1.2 trillion market wipeout on Monday. And should the correction continue, ING argues that it could pressure the Fed to cut interest rates. The odds of rate cuts in 2025 increased to 54 basis points from 42 basis points last Friday. (Source: ING)

Conclusion

DeepSeek’s surprising popularity appears to have shifted the AI battle landscape while sending shockwaves through global markets. While some analysts believe the $1.2 trillion wipeout is “overblown,” the low cost of the Chinese AI model raises questions in the US about overspending on AI and companies’ profit margins.

With the Fed monitoring the fallout, increasing odds of rate cuts could provide a safety net for markets, but whether this correction signals a broader tech reset or a temporary drop remains to be seen. 

As the dust settles, the world will watch to see if this “Sputnik moment” will lead to a new era of innovation or unravel the optimism driving the AI revolution.

*Past performance does not reflect future results.