A groundbreaking AI breakthrough by Chinese startup DeepSeek has rattled US markets, causing a sharp selloff in the tech sector and raising questions about America’s dominance in artificial intelligence.
DeepSeek, a relatively unknown company, unveiled its R1 AI model, a ChatGPT competitor capable of delivering similar results at a fraction of the cost. The announcement revealed that the company spent just $5.6 million on computing power to develop its model, a stark contrast to the hundreds of millions or billions spent by US tech giants like OpenAI, Meta, and Google.
The S&P 500 fell by 1.4%, while the Nasdaq plunged by 2.3% Monday morning. Shares of leading AI chipmaker Nvidia dropped 12%, and major tech players like Meta and Alphabet also saw significant declines. Energy companies that supply power to AI data centers, such as Constellation Energy and Vistra, were similarly hit, with their stocks tumbling by 20% and 26%, respectively.
DeepSeek’s announcement has upended assumptions about the high cost of AI development. While US firms like Meta have budgeted $65 billion for AI development this year, DeepSeek achieved its model on a shoestring budget using underpowered AI chips.
Marc Andreessen, a prominent tech investor and Trump supporter, called DeepSeek’s achievement “one of the most amazing and impressive breakthroughs I’ve ever seen.”
The news comes as the US continues to restrict the export of advanced AI chips to China, underscoring the significance of DeepSeek’s ability to succeed without access to cutting-edge hardware.
The revelation has shaken investor confidence in the dominance of US tech companies. According to Keith Lerner, analyst at Truist, “The DeepSeek model rollout is leading investors to question the lead that US companies have and whether their massive spending will lead to profits—or overspending.”
While US firms remain leaders in developing industrial-scale AI systems, DeepSeek’s emergence highlights a potential shift in the global AI landscape.
DeepSeek’s breakthrough triggered a massive shift in investments:
- Energy companies linked to AI power demands saw sharp declines, including a 19% drop for GE Vernova.
- Natural gas futures tumbled 9%, reflecting reduced demand for electricity generation tied to AI infrastructure.
- Cryptocurrencies, often linked to speculative investments, also plunged.
Despite the market’s reaction, analysts caution against overreacting to DeepSeek’s announcement. “Time will tell if the DeepSeek threat is real,” said Michael Block, market strategist at Third Seven Capital. “Markets may have been looking for an excuse to pull back, and they got a great one here.”
While the R1 model offers consumer-focused capabilities, it is unclear whether DeepSeek can replicate its success in industrial applications requiring massive infrastructure investments.
The rise of DeepSeek could reignite investor interest in Chinese AI companies, which have traded at discounts due to geopolitical tensions and weaker global demand. Charu Chanana, Chief Investment Strategist at Saxo, noted, “DeepSeek’s rise could spark renewed investor interest in undervalued Chinese AI companies, providing an alternative growth story.”
This week, major US tech companies are set to report earnings, with analysts and investors closely watching their responses to DeepSeek’s disruption. The race is on to determine whether US firms can maintain their leadership in AI development or if the landscape is shifting toward new competitors like DeepSeek.
While the full impact of this announcement remains uncertain, it has undoubtedly shaken the global tech industry, sparking questions about the future of AI innovation and the balance of power in the global tech market.