Over the weekend, investors became aware of China’s challenge to US leadership in the development of generative AI. A small, and relatively new Chinese company called DeepSeek has produced a large language model that rivals many of the leading US offerings.
And they’ve done it at a fraction of the cost, apparently using less powerful chips from NVIDIA NASDAQ:NVDA, so bypassing a US chip export embargo. DeepSeek’s AI assistant is now the top-rated free application on Apple’s US App Store.
The news has led to a sharp sell-off across global tech stocks. Investors have been forced to reconsider the outlook for capital expenditure and valuations given the threat of discount Chinese AI models. These appear to be as good, if not better, than US versions.
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US stock index futures in overnight sell-off
US stock index futures have tumbled overnight. Investors rushed to bail out of chipmakers and tech-related equities in reaction to China’s threat to US dominance over the development of generative AI. The threat has led to a sudden, and painful, reconsideration of tech stock valuations along with their plans for future capital expenditures. There is somewhat of a sense of inevitability about this.
DeepSeek uses less advanced H800 chips from Nvidia and spent less than $6 million on training the model. This low cost raises concerns about the size of demand in the Artificial Intelligence market, which the stock market is counting on to continue the bull run.
S&P 500 E-mini futures are down nearly 2% in early morning trading today (Monday), erasing last week’s gains. Nasdaq 100 futures are down more than 3% and Dow Jones is down nearly 1%. We don’t typically see this much market action in graveyard shift trading for the United States, and seeing it indicates that something is happening that could change the prevailing trend.
“While it may be too early to conclude that DeepSeek will definitely cause widespread damage to competing American companies, the AI file will now be more present in the negotiations between the US and China, which will also become an additional pressure card in the latter’s hand in the upcoming trade talks,” said Samer Hasn, a senior market analyst with XS.com in Dubai.
China has proven that it is once again capable of confronting US sanctions in its pursuit of technological development – think of it like the rise of Huawei 2.0 – on the one hand, and it can wave the card of regaining sovereignty over the home of advanced chip manufacturing, Taiwan, on the other.
“With many investors heavily exposed to AI’s biggest players, disruption in the sector could ripple through portfolios,” warned Kenneth Lamont, Principal at Morningstar. “While DeepSeek itself isn’t publicly investable, one way to guard against such risks may be diversifying away from the so-called “Magnificent Seven” tech giants — perhaps by reallocating to equal-weighted strategies. This serves as a fresh reminder for thematic investors: mega-trends rarely unfold as expected, and today’s dominant players might not be tomorrow’s winners.”
Energy stocks also see re-valuations
Energy stocks are also tumbling. The DeepSeek innovation has triggered fears that demand for energy-intensive AI infrastructure could falter, sending ripples through the markets. DeepSeek’s breakthrough signals a shift toward efficiency in AI, which will redefine both energy and AI markets. The opportunities for investors willing to act now are considered enormous.
“This challenges the assumption that AI’s growth is tied to ever-increasing energy consumption,” said UK-based wealth manager Nigel Green at deVere Group. “While the market is reacting to short-term uncertainty, efficiency-driven AI models will expand adoption into new markets and industries. This means more widespread use, deeper integration, and ultimately, sustained demand for energy solutions.”
Renewable energy providers, in particular, are poised to gain as AI infrastructure evolves to prioritize sustainability and ROI. While the immediate reaction in energy stocks reflects uncertainty, the long-term outlook remains robust.