U.S. stock markets saw a significant decline on Monday, with chip giant Nvidia experiencing a massive $600 billion loss in market value. The downturn followed an unexpected breakthrough from DeepSeek, a Chinese artificial intelligence startup, which cast doubt on the dominance of American tech companies.

DeepSeek, a relatively new player in the AI space, unveiled its R1 model last week – an AI system similar to ChatGPT but developed at a fraction of the cost. The company reported spending only $5.6 million on computing resources for its base model, a stark contrast to the hundreds of millions or even billions that leading U.S. firms like OpenAI, Google, and Meta allocate for AI development.

This revelation sent shockwaves through financial markets, particularly the technology sector. On Monday, the Nasdaq dropped 3.1%, while the S&P 500 slid 1.5%. The Dow Jones Industrial Average, supported by health and consumer stocks less impacted by AI, managed a 0.7% gain, rising 289 points. The sell-off was even steeper earlier in the day.

The news arrives as major tech companies ramp up their AI investments. Just last week, Meta announced plans to spend over $65 billion on AI development this year. OpenAI’s CEO, Sam Altman, previously estimated that the AI industry would require trillions in funding to sustain demand for specialized chips and power-hungry data centers.

Venture capitalist Marc Andreessen, a prominent tech investor and supporter of former President Donald Trump, described DeepSeek’s advancement as “one of the most impressive breakthroughs” he had ever witnessed.

DeepSeek’s success is particularly striking given U.S. efforts to restrict China’s access to advanced AI chips due to national security concerns. Despite these limitations, the startup achieved its milestone using less powerful hardware.

Tech stocks plunge

The impact on U.S. tech stocks was severe. Nvidia, the dominant supplier of AI chips, saw its stock plummet nearly 17%, erasing $588.8 billion in market value – the largest single-day loss for any company in history, more than doubling the previous record set by Meta.

For context, Nvidia’s drop exceeded the entire market capitalization of all but 13 publicly traded companies. The company, which had been the most valuable U.S. stock at over $3.4 trillion, slipped to third place behind Apple and Microsoft.

Other tech giants, including Meta and Google’s parent company, Alphabet, also suffered sharp declines. Nvidia’s competitors – Marvell, Broadcom, Micron, and TSMC – saw their stock prices fall as well. Additionally, energy firms and data center operators like Oracle, Vertiv, and Constellation Energy took a hit.

Technology stocks, which account for approximately 45% of the S&P 500, heavily influence broader market movements. According to Keith Lerner, an analyst at Truist, investors are now questioning whether U.S. firms’ heavy AI spending will translate into profits or if they are overinvesting.

As earnings season kicks off for major tech firms, their response to DeepSeek’s breakthrough could lead to continued volatility. Meanwhile, interest in Chinese AI companies is growing.

“Chinese tech companies, including new entrants like DeepSeek, are trading at significant discounts due to geopolitical concerns and weaker global demand,” said Charu Chanana, chief investment strategist at Saxo. “DeepSeek’s success may renew investor confidence in undervalued Chinese AI companies.”

Shifting investment trends

The shockwave extended beyond tech, triggering a broader shift in market sentiment.

In recent years, energy companies benefited from the rising electricity demands of AI-driven data centers, but the tide turned Monday. Constellation Energy, which is working to restart the Three Mile Island nuclear plant to power AI operations, fell 21%. Other energy firms, including Vistra and GE Vernova, saw drops of 28% and 21%, respectively.

Futures for natural gas, a key fuel for electricity production, declined by nearly 6%, while oil prices fell more than 2%. The cryptocurrency market also took a hit.

Is DeepSeek a true threat?

Despite the market’s reaction, a single AI breakthrough may not be enough to dethrone U.S. tech leadership. A mass exodus of customers to a Chinese startup remains unlikely, raising the possibility that investors were simply looking for a reason to sell.

“Time will tell if the DeepSeek threat is real,” said Michael Block, a strategist at Third Seven Capital. “The race is [now] on as to what technology works and how the big Western players will respond and evolve. Markets had gotten too complacent on the beginning of the Trump 2.0 era and may have been looking for an excuse to pull back – and they got a great one here.”

Skepticism also surrounds DeepSeek’s claim that its AI model was built at such a low cost. While no major industry figures have directly disputed it, the market’s reaction hinges on whether the startup’s claims hold up under scrutiny.

Though DeepSeek’s R1 model is a consumer-oriented AI tool comparable to ChatGPT, it has yet to demonstrate capabilities in high-end AI applications that require vast infrastructure and funding.

“Thanks to its rich talent and capital base, the US remains the most promising ‘home turf’ from which we expect to see the emergence of the first self-improving AI,” said Giuseppe Sette, president of AI research firm Reflexivity.

Source: CNN