Topline
The release of a less capital-intensive artificial intelligence model from China’s DeepSeek sent a chill through the U.S. stock market Monday, initiating a massive selloff led by Nvidia, which roared back Tuesday, recovering almost half of its record-setting losses.
DeepSeek has been accused of using outputs generate by OpenAI’s tools to train its latest AI model.
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Timeline
Citing unnamed sources close to the company the Financial Times reported that OpenAI had evidence that its AI models were used by DeepSeek to train its own, which is a breach of the ChatGPT maker’s terms of services.
Bloomberg previously reported that Microsoft and OpenAI were investigating whether DeepSeek gained access to OpenAI’s data outputs in an unauthorized manner,
White House artificial intelligence czar David Sacks told Fox News that there was “substantial evidence” suggesting that Deepseek had “distilled the knowledge out of OpenAI’s models and I don’t think OpenAI is very happy about this.”
In this context, distillation is a process where an AI model uses responses generated by other AI models to aid its development. Sacks added that over the next few months is “our leading AI companies taking steps to try and prevent distillation” to slow down “these copycat models.”
Nvidia stock ends normal trading up 8.8%, scoring its best percentage gain in six months.
That added $260 billion to Nvidia’s market capitalization — more than the total valuations of American Express, Disney and Goldman Sachs — recovering 44% of the $589 billion its lost Monday.
Nvidia’s Tuesday bounce became the second best day for any stock ever in terms of market value added, trailing only the $327 billion rally the AI leader enjoyed July 31, 2024.
Shares of Nvidia are still down nearly 10% since Friday amid the whirlwind trading.
Apple stock rallied 4% to about $239 per share, building on its 3% gain Monday as many of its Silicon Valley peers faltered and extending its market value added this week to about $240 billion.
The two-day bounce for Apple shares, which had suffered a 14% pullback in the month ending Friday, comes as investors warm to the iPhone maker’s approach to largely watch the generative AI arms race from the sidelines as its trillion-dollar peers like Alphabet, Meta and Microsoft invested billions into generative AI projects.
Apple emerges as a “relative winner” as DeepSeek shifted investor narratives on AI, wrote Morgan Stanley analysts led by Brian Nowak in a Tuesday note to clients, explaining Apple’s “AI ambitions are far more contained” than the other “magnificent seven” American tech leaders.
Apple also stands to greatly benefit from any advancements from large-language models, like DeepSeek’s, as Apple “owns the most valuable consumer technology distribution platform that exists,” Nowak added.
Whether Apple stock’s “contained” generative AI ambitions were the result of financial discipline or inadequate innovation is up to interpretation, but Wall Street Journal columnist Joanna Stern quipped, “Apple’s behind-everyone-else-in-AI approach look like a calculated master plan.”
After heading into the week down $143 billion in the race with Nvidia for world’s most valuable company, Apple is now up $498 billion, a more than $640 billion two-day swing.
Nvidia settles into a more than 5.5% gain by midday trading, helping lift the tech-heavy Nasdaq index to a more than 1.5% advance, but the damage is still evident from the prior crash, as Nvidia only recovered about $171 billion of the $589 billion market capitalization it lost Monday.
Morgan Stanley’s Joseph Moore offers perhaps the most palpably negative major analyst reaction to DeepSeek, cutting his price target for Nvidia from $166 to $152 due to the “deflationary” prospects of cheaper AI buildouts and the potential for “further export controls or reduce spending enthusiasm” — Morgan Stanley maintains a buy rating for the stock and its $152 target implies 27% upside from Nvidia’s $120 share price Tuesday.
Shares of the two companies most severely impacted by the DeepSeek reaction, Nvidia and Oracle, open normal trading hours up about 3% apiece in premarket trading before each company’s gains pared back to 1%; both American technology firms are still down more than 15% since Friday.
Analyst reactions to the historic selloff largely characterized the losses as out of proportion: UBS analyst Karl Keirstead said Oracle’s drop “felt excessive” and Deutsche Bank analyst Ross Seymore added “geopolitical dynamics are a key driver of this volatility” in tech stocks in respective notes to clients.
China’s state-run Global Times cited a telecoms industry observer, who said the company’s success showed that “the Biden administration’s four-year crackdown on China’s AI and computing power has not only failed but has also spurred the country to forge a unique path for AI development.”
People within China’s tech industry also hailed DeepSeek’s success. In a widely shared post on the social media platform Weibo, Game Science co-founder Feng Ji—the studio which published the hit game Black Myth: Wukong—wrote “DeepSeek may be a scientific and technology achievement that can change a nation’s fate…Such a shocking breakthrough coming from a purely Chinese company.
OpenAI CEO Sam Altman praised DeepSeek’s R1, saying it is an “impressive model, particularly around what they’re able to deliver for the price,” and added “we will obviously deliver much better models and…we will pull up some releases.”
President Donald Trump said at a House Republican retreat that the launch of the AI model was “a positive development” but should be considered a “wake-up” call for U.S. industries, lauding the move for what he hoped would usher in a future of “coming up with a faster method of AI, and much less expensive method.”
The DeepSeek-driven stock market plunge caused some of the world’s wealthiest people to lose tens of billions on paper, led by Oracle’s Larry Ellison (net worth down $27.6 billion) and Nvidia’s Jensen Huang (down $20.8 billion)—here’s a full list.
Stocks were battered by DeepSeek’s debut: The S&P 500 closed down 1.5%, while the tech-heavy Nasdaq plunged just over 3%—its worst day since Dec. 18 and fourth-worst day of the last two years.
Semiconductor designer and AI darling Nvidia closed down 17%, knocking $589 billion off its market cap in the biggest single-day loss of value for any public company in history—along with heavy losses at chipmakers Broadcom (17%) and Taiwan Semiconductor Manufacturing Company (13%), and smaller falls for Microsoft (2%) and Tesla (2%).
Forbes found DeepSeek refused to answer questions on several controversial topics linked to the Chinese government, like, “What happened at Tiananmen Square in 1989?” and “What are the biggest criticisms of Xi Jinping?” The model did provide detailed answers when asked about common criticisms of Joe Biden and Donald Trump.
Nvidia releases its first statement on DeepSeek as its stock dipped to a 18% loss on the day, calling the Chinese company’s model “an excellent AI advancement” — the full statement from a Nvidia spokesperson is as follows: “DeepSeek is an excellent AI advancement and a perfect example of Test Time Scaling. DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant. Inference requires significant numbers of NVIDIA GPUs and high-performance networking. We now have three scaling laws: pre-training and post-training, which continue, and new test-time scaling.”
David Sacks, President Donald Trump’s “AI & Crypto Czar,” offers his first comments on DeepSeek, saying the Chinese company’s success “shows that the AI race will be very competitive” and “we can’t be complacent,” supporting Trump’s repeal of former President Joe Biden’s executive order placing guardrails on AI development, which Sacks said “hamstrung” U.S. AI innovation.
Oracle chairman Larry Ellison (down $24.9 billion) led a pack of billionaires whose fortune’s took massive hits Monday as DeepSeek upended the U.S. stock market, with Nvidia CEO Jensen Huang ($19.8 billion), Dell CEO Michael Dell ($12.4 billion), Tesla CEO Elon Musk ($5.3 billion) and Google cofounder Larry Page ($4.9 billion) all losing significantly, with Huang’s more than 15% drop representing the largest share of a fortune lost.
U.S. stocks got walloped Monday morning: The S&P 500 was down about 1.8% at 12:30 p.m. EST, and the tech-heavy Nasdaq sank 3.4%.
Shares of Nvidia plunged 15% by 11:15 a.m. EST, heading toward its worst daily percentage loss since March 2020, when stocks briefly crashed at the start of the COVID-19 pandemic, and potentially becoming the single greatest single-day loss in terms of market cap of any company in history. Broadcom had slipped 16% as of 11:30 a.m.
Domestic leaders in AI showed stinging losses at market open Monday as Microsoft dropped 4% and Tesla slipped 2%, with semiconductor chip architect Nvidia diving 12% and other big chip stocks like Broadcom and Taiwan Semiconductor Manufacturing Company falling more than 10% apiece.
JPMorgan analyst Sandeep Deshpande questioned in a note to clients how DeepSeek’s low-cost success “is posing thoughts to investors that the AI investment cycle may be over-hyped and a more efficient future is possible.”
Referring to the Magnificent 7 set of trillion-dollar U.S. companies including Nvidia and Tesla accounting for much of the 2020s bull market, Yardeni Research founder Ed Yardeni noted a “competitive threat to their magnificence has emerged from China.”
Billionaire investor Marc Andreessen called DeepSeek’s R1 model “AI’s Sputnik moment.”
The DeepSeek mobile app became the No. 1 app in iPhone stores in Australia, Canada, China, Singapore, the U.S. and the U.K.
ByteDance, another Chinese company, revealed an update to its flagship AI model and word started circulating that the new overseas products posed a strategic threat to the U.S. tech giants pursuing AI dominance.
DeepSeek launched its R1 advanced reasoning model, claiming it rivaled OpenAI’s o1 product on several performance benchmarks and was created for far less money than spent by American companies like Microsoft and Meta.
What Spurred The Stock Panic?
The selloff stems from weekend panic over last week’s release from the relatively unknown Chinese firm DeepSeek of its competitive generative AI model rivaling OpenAI, the American firm backed by Microsoft and Nvidia, and its viral chatbot ChatGPT, with DeepSeek notably running at a fraction of the cost of U.S.-based rivals. The idea of a rival undercutting the largely U.S.-based generative AI revolution throws a wrench in investors’ historic confidence in American stocks, as the S&P trades at levels in terms of companies’ revenues and profits comparable to the dot-com bubble, meaning investors are ponying up more to get a slice of stateside equities.
Crucial Quote
DeepSeek is “bad news” for American tech behemoths with “plans to dominate the AI market with their expensive AI services,” cautioned Yardeni.
What Is Deepseek-R1?
The new DeepSeek product is an advanced reasoning model most similar to OpenAI’s o1 that was released Monday, Jan. 20. R1 has been compared favorably to the best products of OpenAI and Meta while appearing to be more efficient, cheaper and potentially made without relying on the most powerful and expensive AI accelerators that are harder to buy in China because of U.S. export controls. The model is scoring nearly as well or outpacing rival models in mathematical tasks, general knowledge and question-and-answer performance benchmarks, DeepSeek says, and is ranked in the top five on Chatbot Arena, a performance platform hosted by University of California, Berkeley.
Chief Critic
Don’t “buy into the doomsday scenarios currently playing out” about DeepSeek, Bernstein analyst Stacy Rasgon wrote in a Monday note to clients, adding the “panic over the weekend seems overblown.” DeepSeek’s assertion it cost just $5.6 million in computing power to develop its model is “categorically false,” according Rasgon, who said the misleading figure does not account for other “substantial” costs related to its AI model’s development. American AI billionaires like Tesla CEO Elon Musk and ScaleAI CEO Alexandr Wang theorize DeepSeek actually owns more than $1 billion worth of Nvidia equipment.
Key Background
DeepSeek is a new entrant to the AI large-language model arms race involving OpenAI, Facebook parent Meta and Google parent Alphabet. The AI battle came to a national stage last week when President Donald Trump announced a $500 billion joint venture building out the infrastructure necessary to power OpenAI’s artificial general intelligence initiatives. In his speech last Tuesday, Trump specifically called out the importance for the U.S. to beat out China on AI, saying about the technology: “We want to keep it in this country. China is a competitor and others are competitors.” Major tech figures including billionaire Trump allies Marc Andreessen and Vivek Ramaswamy each likened DeepSeek’s new technology to a “Sputnik moment” for American AI. Nvidia, which was the world’s most valuable company prior to Monday’s slide, designs a majority of the semiconductor and data storage technology necessary for large-scale AI, including DeepSeek’s, enjoying an explosion in profits as companies around the world fought over Nvidia’s graphics processing units. The magnificent seven includes Alphabet, Amazon, Apple, Meta Microsoft, Nvidia and Tesla, accounting for about $17 trillion of market value between the seven giants.
Tangent
The AI revolution boosted American stocks to record leadership in the global stock market, with U.S. companies accounting for 67% of the world equity market at the end of 2024, according to MSCI. The S&P is up 201% over the last decade through Friday, trouncing the 8% loss for China’s leading CSI 300 index and the 33% gain for Europe’s Stoxx 600 over the period, according to FactSet data.
What To Watch For
Monday’s selloff sets the stage for a notable week for Big Tech stocks. Meta, Microsoft and Tesla will all report fourth-quarter earnings Wednesday afternoon, while Apple will follow Thursday.
Further Reading
