Tech stocks tank as Chinese competitor threatens to upend AI frenzy; Nvidia sinks nearly 17%
New York | Wall Street's superstars tumbled Monday as a competitor from China threatens to upend the artificial-intelligence frenzy they've been feasting on.
The S&P 500 dropped 1.5%, dragged down in large part by a 16.9% fall for Nvidia. Other Big Tech stocks also took heavy losses, and they pulled the Nasdaq composite down 3.1% for its worst loss in more than a month.
The damage was focused on AI-related stocks, while the rest of the market held up much better. The Dow Jones Industrial Average rose 289 points, or 0.7%, and the majority of US stocks climbed. But anyone holding an S&P 500 index fund, which are found in many 401(k) accounts, felt the pain because of how influential those tech giants have become on indexes.
The shock to financial markets came from China, where a company called DeepSeek unveiled a large language model that can compete with US giants but at potentially a fraction of the cost. DeepSeek had already hit the top of the chart for free apps on Apple's App Store by Monday morning, and analysts said such a feat would be particularly impressive given how the US government has restricted Chinese access to top AI chips.
Skepticism, though, remains about how much DeepSeek's announcement will ultimately shake the economy that's built around the AI industry, from the chip makers making semiconductors to the utilities hoping to electrify vast data centres gobbling up computing power.
“It remains to be seen if DeepSeek found a way to work around these chip restrictions rules and what chips they ultimately used as there will be many sceptics around this issue given the information is coming from China,” according to Dan Ives, an analyst with Wedbush Securities.
DeepSeek's disruption nevertheless rocked AI-related stocks worldwide.
In Amsterdam, Dutch chipmaking equipment company ASML slid 7%. In Tokyo, Japan's Softbank Group Corp lost 8.3% to pull closer to where it was before leaping on an announcement trumpeted by the White House that it was joining a partnership to invest up to $500 billion in AI infrastructure.
And on Wall Street, Constellation Energy lost more than a fifth of its value, 20.8%. The company has said it would restart the shuttered Three Mile Island nuclear power plant to supply power for data centres for Microsoft.
All the worries sent investors toward bonds, which can be safer investments than any stock. The rush pushed the yield of the 10-year Treasury down to 4.52% from 4.62% late Friday.
It's a sharp turnaround for the AI winners, which had soared in recent years on hopes that all the investment pouring in would remake the global economy and deliver gargantuan profits along the way. Such stellar performances also raised criticism that their stock prices had gone too far, too fast.
Before Monday's drop, which was its worst since the 2020 COVID crash, Nvidia's stock had soared from less than $20 to more than $140 in less than two years, for example.
It was just on Friday that Meta Platforms CEO Mark Zuckerberg was saying he expects his company to invest up to $65 billion this year and grow its AI teams significantly, while talking up a data centre in Louisiana that will be so large it could cover a significant part of Manhattan.
A small group of seven such companies has become so dominant that they alone accounted for more than half the S&P 500's total return last year, according to S&P Dow Jones Indices. They include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
Their immense sizes give them huge sway over the S&P 500 and other indexes that give more weight to bigger companies. That's why many 401(k) holders felt the pain of Nvidia's drop, even if they didn't know they owned any Nvidia, so long as they owned a fund that tracks the S&P 500.
All told, the S&P 500 fell 88.96 points to 6,012.28. The Nasdaq composite dropped 612.47 to 19,341.83, and the Dow Jones Industrial Average rose 289.33 to 44,713.58.
Brian Jacobsen, chief economist at Annex Wealth Management, suggested not overreacting to Monday's sharp swings.
“It is possible that the news out of China could be overstated and then we could see a reversal of the recent market moves,” Jacobsen said. “It is also possible that the news is true, but then that would present new investment opportunities.”
More big swings may be ahead. Apple, Meta Platforms, Microsoft and Tesla are all on the schedule this upcoming week to report how much profit they made at the end of 2024.
The pressure is on companies to keep delivering strong profits, particularly after a recent jump in Treasury yields. When bonds are paying more in interest, they put downward pressure on stock prices. Yields have been on the rise amid a solid US economy and worries about possibly higher inflation coming from tariffs and other policies favoured by President Donald Trump.
So far, big US companies have been reporting better results than analysts expected. AT&T became the latest on Monday, and its stock rose 6.3%.
In stock markets abroad, movements for broad indexes across Europe and Asia weren't as forceful as for the big US tech stocks. Stocks edged 0.1% lower in Shanghai after a survey of manufacturers showed export orders in China dropping to a five-month low.
Bangkok | The 40-year-old founder of China's DeepSeek, an AI startup that has startled markets with its capacity to compete with industry leaders like OpenAI, kept a low profile as he built up a hedge fund and then refined its quantitative models to branch into artificial intelligence.
Liang Wenfeng, who founded DeepSeek in 2023, was born in southern China's Guangdong and studied in eastern China's Zhejiang province, home to e-commerce giant Alibaba and other tech firms, according to Chinese media reports.
The hedge fund he set up in 2015, High-Flyer Quantitative Investment Management, developed models for computerised stock trading and began using machine-learning techniques to refine those strategies.
Like many Chinese quantitative traders, High-Flyer was hit by losses when regulators cracked down on such trading in the past year. However, it reportedly manages $8 billion in assets, ample resources for funding DeepSeek's AI research.
It also has abundant computing power for AI, since High-Flyer had by 2022 amassed a cluster of 10,000 of California-based Nvidia's high-performance A100 graphics processor chips that are used to build and run AI systems, according to a post that summer on Chinese social media platform WeChat. The US soon after restricted sales of those chips to China.
“Thing is, we are sure now that we want to do this, can do this, and are capable of doing this, so we're among the best-suited candidates to tackle it at this moment," Liang told Waves, a tech media outlet, in 2023.
“Currently, neither tech giants nor startups have an unassailable lead. With OpenAI paving the way, everyone is working with published papers and open-source code,” it quoted him as saying.
Liang said he spends his days reading papers, writing code, and participating in group discussions, like other researchers.
DeepSeek is exploring what intelligence means, he said.
“People may think there's some hidden business logic behind this, but it's mainly driven by curiosity,” Liang said.
When DeepSeek was asked, “Who is Liang Wenfeng?” its first answer was to name a different Chinese entrepreneur with the same name, at least as spelled in English letters.
When asked: “Where is Liang Wenfeng from and where did he go to university?” it said that as of October 2023, the most recent knowledge cutoff for DeepSeek's R1 AI model, “there is no publicly available information about Liang Wenfeng's background, including his place of origin or educational history."
"If you are referring to the founder of DeepSeek, details about his personal life or academic background have not been disclosed publicly. For more information about DeepSeek, you can visit its official website,” it said.
Liang's focused approach fits in with his determination to push AI learning forward. After decades of relying on innovation from the West, he says China should be making its own contributions.
“What we see is that Chinese AI can't be in the position of following forever. We often say that there is a gap of one or two years between Chinese AI and the United States, but the real gap is the difference between originality and imitation,” he said in another Waves interview in November. “If this doesn't change, China will always be only a follower — so some exploration is inescapable.”