DeepSeek's low-cost AI model stirs fears of a tech bubble, while defensive stocks see investor rotation
On Monday, the S&P 500 and Nasdaq Composite experienced sharp declines, driven by concerns over a potential artificial intelligence stock bubble.
These fears were sparked by the emergence of Chinese startup DeepSeek, which claimed to have developed a competitive AI model at a fraction of the cost of Silicon Valley’s efforts, according to CNBC.
The Nasdaq Composite fell 3.07 percent to 19,341.83, while the S&P 500 dropped 1.46 percent to 6,012.28.
In contrast, the Dow Jones Industrial Average gained 289.33 points, or 0.65 percent, closing at 44,713.58, buoyed by gains in Apple, Johnson & Johnson, and Travelers.
DeepSeek recently launched R1, an open-source reasoning model that reportedly outperformed OpenAI’s in several tests.
The startup stated that the initial version of its large language model, released in late December, cost under US$6m to design.
While Wall Street has questioned the accuracy of this figure, the claim has raised concerns about the ability to create high-performing AI models with much lower investment.
AI-related stocks suffered significant losses. Nvidia dropped nearly 17 percent, Broadcom fell 17.4 percent, and AMD declined 6.4 percent. Microsoft and Palantir also faced setbacks, losing 2.1 percent and 4.4 percent, respectively.
The ripple effects extended to derivative sectors such as power providers, with Constellation Energy falling nearly 21 percent and Vistra dropping 28 percent.
Sam Stovall, CFRA Research’s chief investment strategist, described the market’s reaction as “a good example of selling first and asking questions later.”
He noted, “Investors sort of feeling that valuations are a bit stretched for technology in general and for semiconductors in particular. We’re going to have volatility, especially when we’re dealing with a richly valued market and exogenous events.”
Despite the sharp declines, Stovall observed a shift toward more defensive sectors, including consumer staples, health care, and real estate.
“What I’ve also been encouraged by is investors are not bailing out of stocks necessarily, but are rotating into the defensive areas... The market at least seems to be coming back,” he added.
Monday’s market activity comes ahead of a critical week for the tech sector.
Major players such as Meta Platforms, Microsoft, Tesla, and Apple—dubbed the ‘Magnificent Seven’—are set to release their latest quarterly results. Meanwhile, the Federal Reserve will hold its first policy meeting of the year.
According to CMEGroup’s FedWatch Tool, traders are pricing in a 97 percent likelihood that the central bank will leave US interest rates unchanged during its Wednesday decision.
