"For two years, markets' belief that the rise of artificial intelligence would usher in a new era of productivity growth has fueled trillions of dollars in stock-market gains.
Nvidia, the maker of the computer chips at the heart of the AI boom, has been in the vanguard of this advance. Wall Street has perceived the company to have an almost unbreachable defense against competition with its offerings of high-tech chips. The company's rapid growth and windfall profits have helped push other technology firms and the Nasdaq Composite Index to record after record, with giddy investors expecting more of the same down the road.
On Monday, the mood turned sour. DeepSeek, a dark-horse power in artificial intelligence, emerged from China. That rattled big tech stocks, led by a plunge of almost $600 billion in Nvidia, which only last week was the world's most valuable company. Nvidia's fall marked the largest one-day loss in market value for any public company.
DeepSeek released last week an AI model that appeared to perform on par with a cutting-edge counterpart from OpenAI, the U.S. firm at the heart of the AI craze. The twist: Creative engineering tricks meant DeepSeek needed far less computing power. The upshot is that the AI models of the future might not require as many high-end Nvidia chips as investors have counted on.
"This is kind of classic in our industry," Salesforce Chief Executive Marc Benioff said. "The pioneers are not the ones who end up being the victors."
The development turned Wall Street upside down. Nvidia's stock dropped 17% to its lowest level since October. The S&P 500's technology sector lost 5.6%, its worst one-day decline in more than four years. In all, Monday's bloodbath wiped out some $1 trillion from the stock market's value, according to Dow Jones Market Data.
Leon Cooperman, the billionaire stock picker who founded Omega Family Office, is one of many investors who said the euphoria surrounding the sector reached unsustainable heights.
"Every third word out of anyone's mouth was 'AI,'" Cooperman said. "Everybody was bulled up in the market. If you have a contrarian bone in your body, you have to look the other way."
The threat to Nvidia is the largest it has faced since sales of its chips skyrocketed during the budding AI boom two years ago. The chip maker booked more than $63 billion in earnings in its last four quarters, making it one of the most profitable companies of all time, and its shares have surged eightfold since the end of 2022.
For its part, Nvidia praised DeepSeek's advancements and pointed to strong future demand for its products. Deploying AI models "requires significant numbers of Nvidia GPUs and high-performance networking," the company said in a statement.
Many investors had latched onto the notion that AI would unleash a wave of productivity in the economy while powering continued profits in a handful of technology giants. Several said Monday's swoon exposed a deep vulnerability in the market: Many investors had crowded into the exact same AI trade.
"It is difficult to know exactly how to make money on AI," said Mike Ogborne, founder of Ogborne Capital Management, a hedge-fund firm in San Francisco that oversees a position in Nvidia. "This could be the first day of a lot more pain."
DeepSeek is the brainchild of Liang Wenfeng, a Chinese technologist who runs an $8 billion hedge fund called High-Flyer. Wenfeng plunged headlong into the business of advanced AI systems about two years ago when he established DeepSeek and made it his mission to compete with the biggest and most well-funded AI startups in the world.
Until recently, though, DeepSeek went largely below the radar. Executives attended Nvidia's annual conferences in San Jose, Calif., and the company was a big early buyer of Nvidia's chips in China. Even after U.S. export restrictions clamped down on its ability to import Nvidia's most advanced chips, it bought less-advanced chips the company made specifically for the Chinese market.
The big moment for DeepSeek came with the recent release of its "R1" model, which dazzled many users of its app with its ability to reason through tough problems in ways that rivaled -- and some say, surpassed -- OpenAI's capabilities. The company's app quickly rose to become the most popular on Apple's app store.
OpenAI CEO Sam Altman on Monday called R1 "an impressive model, particularly around what they're able to deliver for the price," in a post on X. He said his company would move up some of its product releases.
Dan Cleary, a New York-based founder of PromptHub, a startup that helps users improve their queries to AI systems, said he gave DeepSeek's R1 a multi-step math problem. DeepSeek solved it in about four minutes -- three minutes faster than OpenAI's o1 took. DeepSeek also showed more of the work it needed to get there.
He then asked DeepSeek to produce an image of a pelican riding a bicycle, and to identify an erroneous phrase ("Dan surfs in Portugal") he inserted in the text of F. Scott Fitzgerald's "The Great Gatsby." It did both well.
"It's the first really good reasoning model outside of Open-AI" that has been widely released, he said, as well as the first very good model from China.
Despite the hype, some chip-industry insiders don't believe DeepSeek will supplant AI's incumbents or that its claims of needing small amounts of computing power means Nvidia's business is doomed.
Because DeepSeek made its research and results public, other AI companies can also adopt them, potentially paving the way for other models' improvement rather than posing a direct threat to them.
If DeepSeek indeed delivered its model on the cheap, the disruption to the incumbent AI trade could be profound. But the advance could be good news more broadly, said Joseph Amato, chief investment officer at Neuberger Berman, which manages more than $500 billion.
"If you can invest less for a powerful model that has wider adoption because the costs are lower, that's got to be a good thing for the broad-based economy, all the companies that are using AI," he said.
The run-up in Nvidia and other AI stocks has been marked by intense speculation across markets, where big tech companies have never loomed so large. Since a blockbuster earnings report from Nvidia in early 2023 floored investors, everyday Americans and big institutional investors alike have piled into AI stocks.
U.S. technology mutual and exchange-traded funds attracted $23 billion of net inflows in 2024, the largest annual haul since 2000, according to Morningstar Direct data.
The outsize influence of a few big stocks has led some professionals to argue that the group is more vulnerable than ever before.
"When you see these types of levels of concentration, the megacaps, the biggest companies, tend to have a target on their back," said Michael Reynolds, vice president of investment strategy at Glenmede. "Whether it's a regulatory target, whether it's creative destruction as other companies try to take the mantle."” [1]
People who tried to regulate China, Russia, Poland and Lithuania out of today's economy look now like fools.
1. DeepSeek Flips Script on AI --- Chinese dark horse emerges, threatening a market darling and other big tech stocks. Banerji, Gunjan; Fitch, Asa; Langley, Karen. Wall Street Journal, Eastern edition; New York, N.Y.. 28 Jan 2025: A1.
