Why Is Chinese AI DeepSeek Raising Worry For Investors, Sending Shock Waves Across Tech Stocks?

The S&P 500 and the Nasdaq ended sharply lower on Monday (January 27) as Nvidia and other chipmakers sold off after surging popularity of a low-cost Chinese artificial intelligence model raised investor worries about the outlooks for current AI leaders in the United States.

Nvidia's shares sank, while an index of semiconductor stocks .SOXhad its biggest single-day percentage fall since March 2020. Chinese startup DeepSeek has rolled out a free assistant it says uses cheaper chips and less data, raising questions about investor expectations that AI will drive demand along a supply chain from chipmakers to data centers.

DeepSeek's AI Assistant by Monday had overtaken U.S. rival ChatGPT in downloads from Apple's AAPL.O App Store. According to preliminary data, the S&P 500 lost 87.85 points, or 1.44%, to end at 6,013.39 points, while the Nasdaq Composite lost 607.47 points, or 3.04%, to 19,346.83. The Dow Jones Industrial Average rose 291.54 points, or 0.67%, to 44,715.79.Nvidia and other big technology-related companies drove the stock market's sharp gains in recent years. Investors also are keen to hear from the Federal Reserve, which is widely expected to hold its lending rate steady in its first interest-rate decision of the year due on Wednesday.

Chinese startup DeepSeek has rolled out a free assistant it says uses cheaper chips and less data, seemingly challenging a widespread bet in financial markets that AI will drive demand along a supply chain from chipmakers to data centers."They were able to really do this on what some people would call a shoestring budget," said Brian Jacobsen, chief economist at Annex Wealth Management in Brookfield, Wisconsin. "Perhaps this does show that smaller companies will be able to compete in that space and it's going to shift the narrative away from picks and shovels more to the refiners and the jewelers of artificial intelligence." 

The jury is still out on whether DepSeek will change the position of chipmaker Nvidia in the market, said Jacobsen. "A company like Nvidia, where they were viewed as almost having a monopoly, or a really, really strong moat around the whole chip in artificial intelligence ecosystem, that maybe that moat isn't quite as strong as what people originally thought," said Jacobsen. Nvidia whose chips are the top choice for powering AI applications, dropped 15% mid-day, while a gauge of semiconductor stocks dropped 8.5%"See if whether or not all the data that we have so far can actually be validated," said Jacobsen. 

"But it does suggest that maybe we don't need to throw tens of billions of dollars at these issues in order to develop something that's usable for the general public and for industry."DeepSeek's success could also change the U.S. government's approach to trade, said Jacobsen. "We could even see a change in the narrative around policymaking, away from tariffs, embargoes, and restrictions more towards subsidizing and trying to incentivize domestic technology instead," said Jacobsen.