A Chinese competitor’s emergence in the artificial intelligence (AI) arena triggered a sharp sell-off in Wall Street’s tech sector on Monday, threatening the spending boom fueled by the AI frenzy. Big Tech stocks took some of the heaviest losses, with Nvidia down 14.4%, and they dragged the Nasdaq composite down 2.8%. According to Bloomberg, the Nasdaq 100 index sank more than 3%, and Nvidia was headed toward the worst market cap loss for a single stock in market history.
Billions of dollars erased
The S&P 500 fell 1.7% by midday, on track for its worst day in over a month. Big Tech stocks led the decline, with Nvidia plummeting 14.4%, pulling the Nasdaq composite down 2.8%. In contrast, the Dow Jones Industrial Average, less reliant on tech, experienced a modest 0.1% dip (54 points).
The market shock stemmed from DeepSeek, a Chinese company claiming to have developed a cost-effective large language model competitive with U.S. counterparts. DeepSeek’s app quickly topped Apple‘s App Store charts, a notable achievement given U.S. restrictions on Chinese access to advanced AI chips.
Despite the market reaction, skepticism remains about DeepSeek’s long-term impact on the AI supply chain, from chip manufacturing to data center infrastructure. Wedbush Securities analyst Dan Ives highlighted concerns about DeepSeek’s ability to circumvent chip restrictions, given the information’s source.
Nevertheless, DeepSeek’s announcement reverberated through global markets. Dutch chip supplier ASML dropped 6.6%, and Japan’s Softbank Group Corp. fell 8.3%, partially reversing gains from a recent AI infrastructure investment announcement. In the U.S., Constellation Energy, linked to powering Microsoft’s data centers, plummeted 19%.
The flight to safety pushed investors towards bonds, lowering the 10-year Treasury yield to 4.54% from 4.62%.
Time for reversal for AI stocks
This marks a stark reversal for AI-related stocks, which had surged in recent years. Nvidia, for instance, had seen its stock price multiply in less than two years. Other Big Tech companies, including Meta Platforms, had also benefited from the AI hype, with Meta recently announcing significant data center investments.
The dominance of a few tech giants, dubbed the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), has created “concentration risk,” as these companies accounted for over half of the S&P 500’s return last year. This concentration amplifies the impact of disruptions like DeepSeek’s emergence.
However, some analysts caution against overreacting. Annex Wealth Management’s Brian Jacobsen suggested that the news from China might be overstated or present new investment opportunities.
Further market volatility is possible, with Apple, Meta, Microsoft, and Tesla scheduled to release earnings this week. Strong earnings are crucial, especially given recent increases in Treasury yields, which typically pressure stock prices.
