Shocking Chinese AI advancement called DeepSeek sends US stocks down

The world of the technology industry experienced an unexpected shock earlier this week. The Chinese startup DeepSeek, which has only been around for a year, unveiled its groundbreaking artificial intelligence (AI) R1. This model, comparable to ChatGPT from US company OpenAI, is revolutionising the way technology works at a fraction of the cost of giants like OpenAI, Google and Meta. This news has shaken not only the technology industry but also the financial markets.

Unexpected competition at a fraction of the cost

DeepSeek announced that it had spent just $5.6 million to develop the R1 model, an almost negligible amount compared to the billions of dollars invested by US technology companies. According to the Wall Street Journal, this ultra-low price was one of the key factors that stunned analysts and investors. Meta $META, for example, plans to invest $65 billion in AI development this year alone, while OpenAI CEO Sam Altman has said in the past that the entire sector will require trillions of dollars in investment.

"This is one of the most amazing and impressive breakthroughs I've ever seen," Marc Andreessen, an influential technology investor and supporter of former US President Donald Trump, wrote on the X network.

What makes DeepSeek's success even more remarkable is the fact that it was able to achieve these results based on less powerful AI chips. Indeed, the United States has long sought to limit China's access to high-performance AI chips on national security grounds.

US stocks under pressure

News of DeepSeek's breakthrough caused US tech stocks to plummet on Monday. Nvidia $NVDA, a leading supplier of AI chips, saw a 12% drop in pre-market trading. Shares of Meta, Alphabet $GOOG, Marvell $MRVL, Broadcom $AVGO, Palantir $PLTR and Oracle $ORCL lost similarly . The S&P 500 index, roughly 45% of which is made up of technology companies, was set to fall 2.4% in early trading, while the tech-oriented Nasdaq was poised for a 4.2% decline.

"U.S. dominance in technology and AI has been a key factor in their success," said Keith Lerner, an analyst at Truist. "The presentation of DeepSeek's R1 model is leading investors to reassess the lead of U.S. companies and the effectiveness of their massive spending."

How will US giants react?

Moreover, this week is a key one for US tech companies that will be reporting their earnings. Thus, the response to the DeepSeek breakthrough could bring significant turbulence to the markets in the coming days and weeks.

Despite the phenomenal success of the Chinese startup, however, analysts warn that a single exceptional performance may not be enough to disrupt the dominance of the US tech sector. Thus, markets may have overreacted or looked for an excuse to fall.

"Time will tell if the threat from DeepSeek is real. The race is on, and the key will be how Western tech players respond to this challenge," said Michael Block, market strategist at Third Seven Capital.

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Source: CNN