Wall Street on Monday was given a major wake-up call in the developments around Chinese artificial intelligence (AI) startup DeepSeek. The company's low-cost model came as a sobering reality check for megacap U.S. firms that have poured billions into AI, while forcing traders to take another look at their massive valuations.
U.S. chip giant and AI darling Nvidia (NVDA) was undoubtedly the biggest loser from the DeepSeek saga. The firm, which has become the leader in high-performance AI chips, saw a staggering $593B in value wiped off its stock.
Chip and AI stocks in general took it on the chin on Monday. The Philadelphia Semiconductor Index (SOX) slumped -9.15%, while the VanEck Semiconductor ETF (SMH) plunged -9.83%. The overall S&P 500 Information Technology sector slipped -5.58%, while its accompanying Technology Select Sector SPDR Fund ETF (XLK) decreased -4.90%.
Nvidia's (NVDA) AI-linked Magnificent 7 peers, Microsoft (MSFT) and Alphabet (GOOG)(GOOGL), fell -2.1% and about -4%, respectively. On the other hand, Apple (AAPL) gained +3.2% to once again become the world's largest publicly listed company.
The tech-heavy Nasdaq Composite (COMP:IND) shed -3.07% on Monday - its worst session of the new year. The Nasdaq 100 (NDX) fell -2.97%.
Investors moved to the safety of defensive sectors and the bond market. The S&P 500 Consumer Staples sector added +2.85% on Monday, while its accompanying Consumer Staples Select Sector SPDR Fund ETF (XLP) moved up +2.71%. Meanwhile, the benchmark U.S. 10-year Treasury yield (US10Y) fell 3 basis points.
Wall Street (SP500) on Tuesday rebounded from the DeepSeek selloff, as some calm returned to markets.
"Today’s rally after the DeepSeek led technology sell-off yesterday indicates that the worse case scenario that was feared by investors yesterday might not come to fruition. The ultimate answer to these questions will begin to come into focus with Microsoft and Meta announcing earnings after the close tomorrow and Apple on Thursday evening," Chris Fasciano, chief market strategist at Commonwealth Financial Network, said.
"Investors will be focused on the comments from management teams about how they see DeepSeek impacting the development of the AI market going forward and what if any impact it will have on their spending plans and outlook going forward," Fasciano added.
Some of the key takeaways from the DeepSeek scare:
It was a reminder of the outsized role tech stocks have right now in terms of driving market direction. The bulk of the bull run over the last two years was driven by the Magnificent 7 and the AI trade.
"Fundamentally, the reason that this DeepSeek release is such an issue is because the performance of global equities since late-2022 has been powered by U.S. tech stocks. For instance, Nvidia was up +239% in 2023, and then another +171% in 2024, surging rapidly to become the world’s most valuable company by market cap as recently as Friday (down to third yesterday)," Deutsche Bank's Jim Reid said.
"And more broadly, this rally for the S&P 500 has been an unusually narrow one in terms of the companies pushing the index higher, of the sort we haven’t seen since the dot com bubble in the late-1990s. So while that doesn’t make it unsustainable per se, it means that it’s highly vulnerable to a correction among that Magnificent 7 group," Reid added.
It was also a reminder of the disruptive power of technology. Despite curbs on exports of high-performance AI chips to China, DeepSeek's strong performance and low-cost nature will likely cause a big rethink of the major capital expenditure that U.S. tech firms are committing to.
"The market is telling us that cheap, open source AI is a good thing. Less AI-related CapEx means larger buybacks and higher dividends from established companies that can market useful AI tools to large global user bases. Their past investments are sunk costs, irrelevant to tomorrow’s stock prices. AI is now a product development and marketing challenge, not a sinkhole for capital," Jessica Rabe, co-founder of DataTrek Research, said.
Here are some exchange-traded funds with the largest exposure to the Magnificent 7: (MAGS), (FNGS), (MGK), (XLG), and (OEF).
Here are some tech ETFs: (VGT), (XLK), (IYW), (FTEC), (IXN), and (RSPT).
And some popular ETFs that track the benchmark S&P 500 (SP500): (SPY), (VOO), (IVV), (RSP), (SSO), (UPRO), (SH), (SDS), and (SPXU).
