U.S. tech stocks are crumbling like dry sand in premarket trading Monday as Chinese open-source artificial intelligence platform DeepSeek R1 sparks investor fears over AI competition and capital allocation into high-cost American firms.

Futures on the Nasdaq 100 plunged 4% as of 8:00 a.m. ET, setting the stage for their worst session since September 2022.

Semiconductor stocks, the backbone of AI development, are bearing the brunt of the selloff, with AI darling Nvidia Corp. NVDA plunging 12%, potentially eyeing its worst day since March 18, 2020.

The iShares Semiconductor ETF SOXX is down 4.5%, with heavy losses also hitting Marvell Technology Inc. MRVL, down 13%, Broadcom Inc. AVGO, down 11%, and Arm Holdings plc ARM, down 9.5%.

AI infrastructure and data center stocks are also seeing steep declines, with GE Vernova Inc. GEV plummeting 14%, Vistra Corp. VST and Constellation Energy Corp. CEG both sliding 11.5%, and Arista Networks Inc. ANET falling 10%.

The S&P 500 is not immune to the fallout, with futures on the index falling 2.2%, while the Dow Jones Industrial Average is inching 0.8% lower due to its smaller exposure to tech.

With AI stocks leading market gains over the past year, today’s rout threatens to wipe out $1.2 trillion in market capitalization.

DeepSeek: A Game-Changer In AI?

DeepSeek R1, an open-source AI model, is reportedly rivaling top U.S. AI models at a fraction of the cost, leveraging lower-power NVIDIA chips to bypass U.S. export restrictions.

“DeepSeek has produced a large language model that rivals many of the leading U.S. offerings. And they’ve done it at a fraction of the cost, using less powerful chips,” said David Morrison, senior market analyst at Trade Nation.

Investors are now questioning whether AI software firms can sustain their pricing models.

Bloomberg Intelligence analyst Mandeep Singh highlighted that OpenAI charges $200 per month for its premium subscription, raising doubts about its pricing power if open-source alternatives offer similar or superior performance at a significantly lower cost.

“How do you justify that cost if an open-source platform does it better?” Singh said.

With billions in capital expenditures planned for 2025-2027, any shift in corporate spending could redefine the trajectory of AI investing.

“I don’t think they are walking back on 2025 capex,” Singh added, dismissing the idea that companies would scale back investments immediately.

The AI frenzy that has propelled the “Magnificent Seven” stocks to record highs is now facing its biggest test. With major U.S. tech earnings due this week, investors are demanding answers.

“If the Mag-7’s Q4 earnings disappoint, these seven stocks could drag the S&P 500 down significantly since they account for a whopping 30.5% of the market cap of the index,” warned Ed Yardeni, President of Yardeni Research.

Chinese Stocks To Watch

In a note on Sunday, Goldman Sachs analyst Ronald Keung highlighted that DeepSeek’s breakthrough could lower barriers to entry in AI, paving the way for increased global competition.

“We believe increasingly agile Chinese models and significant improvement in computing cost efficiencies could drive further room for wider adoption, exploration, and proliferation of AI applications,” Keung said.

He also indicated the potential for Chinese AI firms to expand their influence, pointing to companies like Alibaba Group Holding Ltd. BABA, China’s largest cloud provider, and Tencent Holdings TCEHY, which has deep AI integration within its WeChat ecosystem.

According to Keung, also data centers GDS Holdings Ltd. GDS and Vnet Group Inc. VNET are expected to “benefit from ongoing public cloud and AI computing demand growth from multi-year higher AI adoption.”

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