Chinese AI Breakthrough Sends US Stocks Tumbling
The American stock market experienced a sharp drop on the morning of January 27, triggered by the unexpected breakthrough of the Chinese company DeepSeek in the field of artificial intelligence. The success of the startup, which was founded just a year ago, has cast doubt on the dominance of the American tech industry and sparked panic among investors, as reported by NewsBox.
DeepSeek has unveiled an AI model named R1, which matches ChatGPT in capabilities while requiring significantly lower computational costs. According to the company, the development of the basic model cost only 5.6 million dollars, whereas American giants spend hundreds of millions or even billions on similar technologies, writes CNN.
This news hit the markets like a bolt, triggering a downturn, especially in the tech sector. The S&P 500 index dropped by 1.4%, while the tech-heavy Nasdaq tumbled 2.3%. The Dow Jones remained almost unchanged. Although the initial drop in early trading was more significant, investors apparently deemed the initial sell-off excessive.
Shares of American tech companies fell sharply. Nvidia, a leader in AI chip production, whose stock had more than doubled over the past two years, lost 12%. Meta and Alphabet (Google's parent company) stocks also saw significant declines. Nvidia's competitors, such as Marvell, Broadcom, Micron, and TSMC, experienced considerable drops too. Besides chip manufacturers, stocks of companies related to data centers, like Oracle, Vertiv, Constellation, and NuScale, also decreased.
The plunge in the tech sector dragged down the entire stock market. According to Truist analyst Keith Lerner, tech companies make up about 45% of the S&P 500 index, making their influence on the market very significant.
"In the end, the US's superiority is based on the technological leadership of American companies in the AI field," said Lerner. "The emergence of DeepSeek's model makes investors question the leadership of American companies and the expenditure's potential profitability."
The reaction of tech companies to DeepSeek's breakthrough could be crucial in the coming week, when their financial reports are released, possibly causing further market volatility. Investors are closely monitoring the progress of Chinese companies in the AI domain.
"Chinese tech companies, including newcomers like DeepSeek, are trading at significant discounts because of geopolitical issues and weak global demand," said Charu Chanana, Chief Investment Strategist at Saxo. "DeepSeek's success may rekindle investor interest in undervalued Chinese AI companies, offering an alternative growth narrative."