Newly launched Chinese AI app DeepSeek has surged to number one in Apple's App Store and has triggered a sell-off of U.S. tech stocks over concerns that Chinese companies' AI advances could threaten the bottom line of tech giants in the United States and Europe.Justin Sullivan/Getty Images
A day of financial unrest that wiped out more than US$1-trillion from tech stocks around the world came courtesy of an unlikely threat: cheap artificial intelligence.
It started when a low-profile Chinese startup launched an AI app called DeepSeek, which was built on a shoestring budget but seems to be just as powerful as the leading large language models.
This could prove to be a technological breakthrough that makes AI more accessible, with the benefits spreading to companies beyond the Magnificent Seven group of tech giants. “If so, the best way to play AI might be the S&P 493 companies that will be cutting their costs and boosting their productivity using this new technology,” wrote Ed Yardeni, the chief investment strategist at Yardeni Research, in a note.
Investors sold technology stocks across the globe on Monday as they worried that the emergence of a low-cost Chinese artificial intelligence model would threaten the dominance of current AI leaders like Nvidia.
Reuters
But the stock market didn’t see DeepSeek as a good thing Monday. It saw a sudden challenge to American dominance in AI, which has been at the heart of an incredible run in stock prices over the past two-plus years. “We’ve been sitting here wondering who else is going to show up,” said Chris Stuchberry, senior portfolio manager at Wellington-Altus Private Wealth. “It’s no surprise to see China show up on price.”
Explainer: What is DeepSeek and why is it disrupting the AI sector?
DeepSeek was apparently built in two months for just US$5.6-million. This relatively minuscule number must have sent shivers down the spines of some Silicon Valley executives, who have spent hundreds of millions of dollars developing their own large language models.
Last week, Meta Platforms Inc. META-Q chief executive officer Mark Zuckerberg said the company will spend US$60- to US$65-billion to develop its AI, while building a data centre “so large it would cover a significant part of Manhattan.”
In the process of this spending spree, the U.S. incumbents have been lifted by investors to stratospheric heights as the stewards of world-changing technology.
The Magnificent Seven, in large part propelled by the AI fervour, have become gargantuan, commanding around US$18-trillion in market capitalization before Monday’s selloff. That’s six times the value of all the companies trading on the Toronto Stock Exchange.
U.S. President Donald Trump said on Monday (January 27) that Chinese startup DeepSeek's technology should act as spur for American companies and said it was good that companies in China have come up with a cheaper, faster method of artificial intelligence.
Reuters
Bloated valuations have made their stock prices vulnerable to even the slightest setback. As a group, the Magnificent Seven trades at about 30 times forward earnings – a premium of 60 per cent to the rest of the U.S. market, according to data from Yardeni Research.
Skeptics have been predicting an end to the AI bubble in much the same way the dot-com bubble burst 25 years ago. On Monday, there was some concern that DeepSeek could be the catalyst that deflates the entire market.
Now, as then, we have a shock that could force a mass repricing of tech stocks and declining capital expenditures, which back in 2000 had “broad-based macro implications,” including a mild recession, wrote George Saravelos, a managing director at Deutsche Bank, in a note.
Nvidia Corp. NVDA-Q, the chipmaker at the core of the AI phenomenon, was in the middle of the market action Monday.
DeepSeek’s developers managed their costs by using lower-end Nvidia chips. The company’s most powerful AI chips reportedly carry price tags of US$30,000 to US$40,000 per unit.
Nvidia’s absurd profit growth in the last couple of years has seen its stock price soar 900 per cent since the end of 2022. Until Monday, that is, when its shares dropped 17 per cent, wiping out nearly US$600-billion in market capitalization – easily the worst single-day loss by any company in U.S. market history. Total tech sector losses took the toll over the US$1-trillion mark.
Chinese startup DeepSeek's launch of its latest AI models, which it says are on a par or better than industry-leading models in the United States at a fraction of the cost, is threatening to upset the technology world order. Alex Cohen produced this report.
Reuters
But the stock market has a well-established habit of overreacting. Bad news tends to be catastrophized and extrapolated to extremes. Recent shocks, like the string of U.S. bank failures in 2023, or last year’s blow-up of the yen carry trade, were also met with great consternation, only to fade into virtual irrelevance.
Much about DeepSeek still needs to be tested and verified, including its shockingly low cost.
And somewhat lost in the selloff is the fact that more affordable AI technology should be beneficial to lots of businesses big and small.
AI that costs less and uses less energy may shake up the sector and cause some ripples in financial markets, but it ought to be seen as a net positive on a global scale.
Tech investor Marc Andreessen, who has been advising U.S. President Donald Trump, wrote in an X post Friday: “DeepSeek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen – and as open source, a profound gift to the world.”