Wall Street experienced a dramatic sell-off on Monday as a Chinese tech company’s announcement of a powerful, cost-effective AI model sparked fears of a major disruption to the global artificial intelligence landscape, Al Jazeera reports.
The news sent investors fleeing from high-flying tech stocks, particularly those that have led the recent AI investment boom.
The S&P 500 index fell 1.7% in midday trading, on track for its worst performance in over a month. The tech-heavy Nasdaq composite plummeted 2.8%, with semiconductor giant Nvidia taking a particularly hard hit, dropping 14.4%. In stark contrast, the Dow Jones Industrial Average, with its less pronounced tech focus, remained relatively stable, down a mere 0.1% or 54 points.
The catalyst for the market turmoil was DeepSeek, a Chinese company that unveiled a large language model purportedly capable of competing with US AI leaders while drastically cutting costs. DeepSeek’s app surged to the top of the Apple App Store charts on Monday morning, a notable feat given the US government’s restrictions on China’s access to advanced AI chips.
Silicon Valley venture capitalist Marc Andreessen labeled DeepSeek’s “R1” model as AI’s “Sputnik moment”, drawing a parallel to the Soviet Union’s satellite launch that ignited the space race. However, skepticism remains regarding the long-term impact of DeepSeek’s announcement on the entire AI supply chain.
Nevertheless, the initial reaction was palpable. Across the globe, stocks tied to the AI sector took a beating. In Amsterdam, Dutch chip supplier ASML slid 6.6%. In Tokyo, Softbank Group Corp lost 8.3%, reversing gains made from a recent White House announcement of an AI infrastructure partnership. On Wall Street, Constellation Energy saw its shares plummet by 19% as the company plans to restart the Three Mile Island nuclear plant to power data centers for Microsoft.
The sudden shift in investor sentiment sent them rushing towards safer havens like bonds. This represents a significant turnaround for the tech companies that have been the darlings of the market, with many seeing exponential stock growth based on AI investment and its perceived transformative impact on the global economy. Nvidia’s stock, for example, had soared from under $20 to over $140 in less than two years.
This “AI frenzy” had extended beyond Nvidia, with other major tech companies benefiting as well. Meta Platforms CEO Mark Zuckerberg, just last Friday, announced plans to invest up to $65 billion this year, highlighting a massive new data center in Louisiana.
The dominance of a small group of tech companies, known as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), has become so pronounced that they accounted for more than half of the S&P 500’s total return last year. This concentration, however, amplifies the risks associated with investing so heavily in a limited number of stocks, a phenomenon market experts refer to as “concentration risk.”
