DeepSeek AI buzz puts tech stocks on track for $1 trillion wipeout (27.01.2025)
Marc Andreessen Warns Chinese ChatGPT Rival DeepSeek Marks ‘AI’s Sputnik Moment’. A breakthrough by Chinese artificial intelligence startup DeepSeek has sent shockwaves through global markets, triggering a $1 trillion sell-off in U.S. and European tech stocks. Investors are now questioning the lofty valuations of some of America’s largest tech giants as DeepSeek’s latest AI model, R1, challenges the narrative that China lags behind the West in innovation. Instead, it suggests China may be on the verge of surpassing the U.S. in the AI race, drawing comparisons to the USSR’s historic Sputnik achievement. DeepSeek’s reasoning model R1, released as a fully open-source tool last week, has not only shattered the myth that China can only replicate Western technology but also raised concerns about the future dominance of U.S. tech giants like Nvidia. The model’s capabilities have sparked a reevaluation of the massive investments in AI by companies such as Microsoft, Meta, and Alphabet, as well as the sustainability of their valuations.
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Market Turmoil and Investor Concerns
The impact of DeepSeek’s announcement was immediate. U.S. equity markets opened sharply lower, with Nasdaq 100 futures plunging as much as 5.2% in overnight trading before recovering slightly to a 3.9% loss by 7:30 a.m. in New York. This marked the steepest intraday drop since August. In Europe, tech stocks led the decline, with chip equipment maker ASML Holding NV falling as much as 12%. The Cboe Volatility Index (VIX), a measure of market fear, surged to 21.5.
Nvidia, whose shares had soared ninefold over the past two years, saw its stock slide more than 10% in premarket trading, erasing approximately $340 billion in market value. The Nasdaq 100 and Europe’s Stoxx 600 technology sub-index were on track to lose a combined $1.2 trillion in market capitalization if the losses held.
A Challenge to the AI Investment Thesis
DeepSeek’s rise to the top of Apple’s App Store charts over the weekend has further intensified the debate. Its AI model, which demonstrates transparency by showing its reasoning process, has been praised by prominent investor Marc Andreessen as “one of the most amazing and impressive breakthroughs.” The app’s success has raised questions about the necessity of the billions of dollars being poured into AI development by Western tech giants.
“DeepSeek shows that it is possible to develop powerful AI models at a lower cost,” said Vey-Sern Ling, managing director at Union Bancaire Privée. “This could potentially disrupt the investment case for the entire AI supply chain, which has been driven by massive spending from a handful of hyperscalers.”
Earnings Week Adds Pressure
The sell-off comes at a critical time, as major tech companies like Apple and Microsoft prepare to report earnings. Profit growth in the sector is expected to have slowed, while valuations remain elevated, reigniting concerns about the sustainability of the AI-driven rally in tech stocks. By 6:18 a.m. New York time, roughly 278,000 Nasdaq 100 futures contracts had traded, about three times the 30-day average for that time of day, according to Bloomberg data.
China’s AI Ambitions Take Center Stage
DeepSeek, founded by quant fund chief Liang Wenfeng, has positioned itself as a formidable competitor to OpenAI and Meta Platforms. Its open-source approach has allowed it to bypass U.S. trade restrictions on advanced chips, demonstrating that cutting-edge AI models can be developed without access to the most sophisticated hardware. This has cast doubt on the assumption that China’s AI technology is years behind that of the U.S.
“While current leaders like Nvidia have a strong foothold, DeepSeek’s emergence is a reminder that AI dominance cannot be taken for granted,” said Charu Chanana, chief investment strategist at Saxo Markets. “Competition is intensifying, and future competitors will evolve faster, challenging established companies more quickly.”
Positive Reaction in Chinese Markets
In contrast to the global sell-off, Chinese AI-related stocks rallied. Mainland-listed Merit Interactive Co., which has integrated DeepSeek’s model into its marketing, surged by its daily limit. Hong Kong’s Hang Seng Tech Index also climbed as much as 2% ahead of the Lunar New Year holidays.
A Wake-Up Call for Silicon Valley
The success of DeepSeek’s model has prompted a broader reassessment of the AI landscape. “DeepSeek’s product is deeply problematic for the thesis that Silicon Valley’s massive capital expenditure is the only way to approach AI,” said Nirgunan Tiruchelvam, head of consumer and internet at Aletheia Capital. “It calls into question the enormous resources dedicated to AI development.”
As the Nasdaq 100 trades at 27 times estimated forward earnings—above its three-year average of 24 times—investors are bracing for a potential reckoning. Nvidia, trading at 33 times earnings, remains a key player but faces growing competition.
Conclusion
DeepSeek’s breakthrough has not only challenged the dominance of U.S. tech giants but also signaled a new era of global competition in AI. As Marc Andreessen aptly noted, this could be AI’s “Sputnik moment,” a pivotal event that reshapes the technological landscape. With earnings reports looming, this week will be a crucial test for the sector, as investors grapple with the implications of China’s rising AI prowess.
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