DeepSeek Panic: Here’s Why Tech Stocks Are Getting Crushed As Nasdaq Paces To Worst Day Of 2025

Posted by author January 27, 2025 Tech

Topline

The release of a less capital-intensive artificial intelligence model from China’s DeepSeek sent a chill through the U.S. stock market Monday, initiating a massive selloff underscoring the fragile backdrop behind the record market.

Monday was a brutal day for American big tech stocks.

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Key Facts

U.S. stocks got walloped Monday: The S&P 500 fell about 2% at 9:30 a.m. EST market open, and the tech-heavy Nasdaq sank 3.5%, heading toward its worst percentage loss since Dec. 18 and third-worst day of the last two years.

Domestic leaders in AI headlined the stinging losses, as Microsoft dropped 4% and Tesla slipped 2%, while semiconductor chip architect Nvidia dove 12% and other big chip stocks like Broadcom and Taiwan Semiconductor Manufacturing Company fell more than 10% apiece.

The selloff stems from weekend panic over last week’s release from the relatively unknown Chinese firm DeepSeek of its competitive generative AI model rivaling OpenAI, the American firm backed by Microsoft and Nvidia, and its viral chatbot ChatGPT, with DeepSeek notably running at a fraction of the cost of U.S.-based rivals.

As for why the DeepSeek news is so concerning for U.S. equities, JPMorgan analyst Sandeep Deshpande questioned in a note to clients how DeepSeek’s low-cost success “is posing thoughts to investors that the AI investment cycle may be over-hyped and a more efficient future is possible.”

And more broadly, the idea of a rival undercutting the largely U.S.-based generative AI revolution throws a wrench in investors’ historic confidence in American stocks, as the S&P trades at levels compared to companies’ revenues and profits comparable to the dot-com bubble, meaning investors are ponying up more to get a slice of stateside equities.

Referring to the “magnificent seven” set of trillion-dollar U.S. companies including Nvidia and Tesla accounting for much of the 2020s bull market, Yardeni Research founder Ed Yardeni noted a “competitive threat to their magnificence has emerged from China.”

Crucial Quote

DeepSeek is “bad news” for American tech behemoths with “plans to dominate the AI market with their expensive AI services,” cautioned Yardeni.

Chief Critic

Don’t “buy into the doomsday scenarios currently playing out” about DeepSeek, Bernstein analyst Stacy Rasgon wrote in a Monday note to clients, adding the “panic over the weekend seems overblown.” DeepSeek’s assertion it cost just $5.6 million in computing power to develop its model is “categorically false,” according Rasgon, who said the misleading figure does not account for other “substantial” costs related to its AI model’s development. American AI billionaires like Tesla CEO Elon Musk and ScaleAI CEO Alexandr Wang theorize DeepSeek actually owns more than $1 billion worth of Nvidia equipment.

Key Background

DeepSeek is a new entrant to the AI large-language model arms race involving OpenAI, Facebook parent Meta and Google parent Alphabet. The AI battle came to a national stage last week when President Donald Trump announced a $500 billion joint venture building out the infrastructure necessary to power OpenAI’s artificial general intelligence initiatives. In his speech last Tuesday, Trump specifically called out the importance for the U.S. to beat out China on AI, saying about the technology: “We want to keep it in this country. China is a competitor and others are competitors.” Major tech figures including billionaire Trump allies Marc Andreessen and Vivek Ramaswamy each likened DeepSeek’s new technology to a “Sputnik moment” for American AI. Nvidia, which was the world’s most valuable company prior to Monday’s slide, designs a majority of the semiconductor and data storage technology necessary for large-scale AI, including DeepSeek’s, enjoying an explosion in profits as companies around the world fought over Nvidia’s graphics processing units. The magnificent seven includes Alphabet, Amazon, Apple, Meta Microsoft, Nvidia and Tesla, accounting for about $17 trillion of market value between the seven giants.

Tangent

The AI revolution boosted American stocks to record leadership in the global stock market, with U.S. companies accounting for 67% of the world equity market at the end of 2024, according to MSCI. The S&P is up 201% over the last decade through Friday, trouncing the 8% loss for China’s leading CSI 300 index and the 33% gain for Europe’s Stoxx 600 over the period, according to FactSet data.

What To Watch For

Monday’s selloff sets the stage for a notable week for big tech stocks. Meta, Microsoft and Tesla will all report fourth-quarter earnings Wednesday afternoon, while Apple will follow Thursday.