January 28, 2025
AI Stock Boom Faces $1 Trillion Reality Check from Chinese Startup DeepSeek

For nearly two years, artificial intelligence has been the crown jewel of the US stock market, driving an unprecedented rally in tech equities. The Nasdaq 100 Index surged 92% since the beginning of 2023, adding over $14 trillion in value. At the forefront of this AI-fueled momentum stood US tech giants like Nvidia, Meta Platforms, and OpenAI, solidifying America’s dominance in AI innovation and investment.

However, a seismic shift occurred this week as DeepSeek, a Chinese AI startup, burst onto the scene with a revolutionary platform. Offering comparable AI performance at a fraction of the cost and energy consumption, DeepSeek sent shockwaves through global markets, wiping nearly $1 trillion off the Nasdaq 100’s valuation in a single day.

The Nasdaq’s Worst Day in Six Weeks

The Nasdaq 100 dropped 3% on Monday, marking its worst day in six weeks. Nvidia, a key beneficiary of the AI boom, suffered its sharpest decline since the pandemic hit in March 2020, erasing $600 billion in market value. This market turmoil highlights just how precarious the valuations of AI-driven stocks have become.

The S&P 500 also felt the ripples, falling by 1.5%. Still, the broader market remained relatively stable, with sectors outside of AI showing resilience. The Dow Jones Industrial Average, for instance, rose 0.7%, with only seven of its 30 members ending the day in the red.

DeepSeek: A Game-Changing Rival

DeepSeek’s AI platform has rapidly climbed the ranks, becoming the top app on Apple’s App Store over the weekend. Investors and analysts are taking note of its potential to disrupt the AI supply chain, which has been driven by high costs and heavy spending by companies like Meta, Microsoft, and Alphabet.

The challenge from DeepSeek has raised doubts about the sustainability of the high valuations in the AI sector. Nvidia, for example, is trading at 33 times estimated forward earnings, significantly above its three-year average of 24 times.

US Tech Under Scrutiny

With major earnings reports from Apple and Microsoft looming this week, the market is bracing for further volatility. Investors are increasingly questioning whether the enormous capital outlays in AI will translate into the returns needed to justify sky-high valuations.

Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, warned that the market may have overestimated the dominance of US AI companies. “To assume these companies have cornered the market is a huge mistake, and that is now being re-rated.”

A New Chapter in AI Competition

DeepSeek’s emergence underscores the intensifying competition in AI, particularly as it challenges the notion that China lags significantly behind the US in this space. Despite US restrictions on advanced chip exports to China, DeepSeek leveraged open-source technology to achieve its breakthrough.

Broader Implications

The shockwave caused by DeepSeek is a wake-up call for the tech sector. Analysts suggest that companies relying on AI technology, rather than those developing it, may benefit from DeepSeek’s open-source approach, as it could lower implementation costs.

Additionally, the Federal Reserve’s upcoming policy meeting and President Donald Trump’s deregulation and tax-cut plans could introduce further variables into an already volatile market.

Conclusion

DeepSeek’s rise marks a pivotal moment in the AI landscape, compelling investors to rethink how they value AI stocks and US tech dominance. As competition intensifies, the future of AI appears more uncertain than ever, with the potential for major shifts in market dynamics on the horizon.