Investors react to the emergence of a low-cost Chinese AI model, questioning Western dominance
On Monday, technology stocks saw a significant downturn as investors responded to the launch of a groundbreaking artificial intelligence model by Chinese startup DeepSeek. The debut of DeepSeek's low-cost AI assistant has cast doubts on the dominance of Western tech giants in the AI sector, prompting a sell-off of major technology shares.
A Turning Point in AI Investment
Last week, DeepSeek unveiled a free AI assistant that operates using less data at a fraction of the cost of existing models from incumbent players. This development is seen by many as a potential turning point in the level of investment required for AI, potentially disrupting the high spending by Western companies.
Futures on the Nasdaq 100 dropped nearly four percent, indicating the index could face its most significant daily decline since September 2022 if losses persist. The S&P 500 futures fell by two percent. Shares in AI chipmaker Nvidia plummeted by 10 percent, rival Oracle dropped eight percent, and AI data analytics firm Palantir lost seven percent in pre-market trading.
DeepSeek's Rapid Rise
By Monday, DeepSeek had overtaken U.S. rival ChatGPT in downloads on the Apple Store. Offering a viable and cheaper AI alternative, DeepSeek's emergence has raised questions about the sustainability of the high levels of spending and investment on AI by Western companies such as Apple and Microsoft.
From Tokyo to Amsterdam, shares in AI-focused companies tumbled as investors reassessed the competitive landscape.
\"We still don't know the details and nothing has been 100 percent confirmed regarding the claims,\" said Jon Withaar, a senior portfolio manager at Pictet Asset Management. \"But if there truly has been a breakthrough in the cost to train models from over \$100 million to this alleged \$6 million number, this is very positive for productivity and AI end-users, as cost of access is obviously much lower.\"
The AI Investment Hype Under Scrutiny
The excitement surrounding AI has fueled significant capital inflows into equity markets over the past 18 months, with investors buying into the technology and inflating company valuations. This trend has sent stock markets to record highs, but the emergence of DeepSeek is causing investors to question the sustainability of this hype.
'Sputnik Moment' for AI
Silicon Valley venture capitalist Marc Andreessen described DeepSeek's R1 model as AI's \"Sputnik moment,\" referencing the Soviet Union's satellite launch that marked the beginning of the space race in the late 1950s. \"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen—and as open source, a profound gift to the world,\" he said in a post on social media platform X.
Global Impact on Tech Stocks
In Europe, shares of companies connected to AI saw significant declines. ASML, which counts customers such as TSMC, Intel, and Samsung, dropped almost 11 percent. In Japan, startup investor SoftBank Group slid more than eight percent after announcing a \$19 billion commitment to fund Stargate, a data-center joint venture with OpenAI.
Major technology firms have increased spending to develop AI capabilities, with optimism over potential returns driving stock valuations to unprecedented levels. Nvidia alone has risen by over 200 percent in about 18 months, trading at 56 times the value of its earnings, compared to the Nasdaq's multiple of 16, according to data from LSEG.
\"The market is questioning the capital expenditure spending of the major tech companies,\" said Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore.
Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, noted, \"The idea that the most cutting-edge technologies in America, like Nvidia and ChatGPT, are the most superior globally—there's concern that this perspective might start to change.\"
He added, \"I think it might be a bit premature.\"
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DeepSeek's 'Sputnik moment' prompts investors to sell big AI players
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