Nasdaq Nosedives in DeepSeek Shocker Turmoil

Global tech stocks plummeted after DeepSeek, a Chinese open-source AI company, released an update that could challenge prevailing assumptions about the development of artificial intelligence.

The Shocker Crash

Markets were poised to erase $1.2 trillion in market capitalisation on Monday after the Chinese AI startup DeepSeek garnered attention for potentially offering a more cost-effective solution that can run on less advanced chips. The company, just over a year old, claims to offer comparable performance to the world's leading chatbots at a fraction of the cost. It is a not-for-profit organisation founded by Liang Wenfeng, the head of an AI-based quantitative hedge fund called High-Flyer. The company has developed other software, such as mobile apps, and previously released iterations of Large Language Model (LLM) AI that aim to compete with major players like ChatGPT, Claude, and Gemini. Its latest release (third generation or V3), R1, is causing a market stir.

The reason for the market turmoil is that if DeepSeek's claims are accurate, it could generate a paradigm shift in AI, or what Silicon Valley entrepreneur and US President Donald Trump described as "AIs Sputnik moment," referring to how the Soviet Union's launch of the first satellite shocked American engineers, galvanising efforts to win the space race. In conjunction with the EU, the US has been implementing measures to restrict access to the most advanced chips for training AI models, forcing Chinese developers to create models requiring far less computing power, resulting in lower costs. If such models can be successfully developed on much cheaper and more readily available machines, it could threaten the bottom line of developers relying on cutting-edge technology, such as ASML and Nvidia, both of which saw their stocks tumble on Monday.

The Impact and Beyond

The effect of the news was so substantial that it dragged down the entire stock market, with the Nasdaq leading losses on Monday due to its heavy tech weighting, but the S&P 500 and DJIA were also down in the wake of the news. Megacap tech stocks such as Meta and Microsoft, which have significantly invested in cutting-edge AI, saw their shares plummet as investors questioned whether the expense would pay off. Additionally, a host of Big Tech earnings are coming this week, adding to the risk profile, with the two companies mentioned above reporting alongside Apple and Tesla. Now, traders will be focused on any comments from those companies about the impact of DeepSeek.

The Chinese AI model is available for free on the Apple Store and has become the most popular Artificial Intelligence app to be downloaded this month. While many claims have been made about the models, verifying their accuracy might take some time once more details become available. The company claims to have developed its model on older H800 chips at a cost of around $6 million, compared to a price tag of billions for rivals. Markets have already been questioning the capital spending of major companies on the development of AI, even before the arrival of DeepSeek. However, assessing how well it performs in the real world will likely take some time compared to existing AI applications.

Start of a Correction or Flag?

Nasdaq traded near record highs before plunging lower, forming a potential downward channel which suggests further downside in the short term. If the index breaks below the lower trendline support of around 20500, it could exacerbate selling pressure and signal an arbitrary benchmark 10% correction to 20000 from the peak. Conversely, reclaiming the 22130 record might open the door to a 23000 handle, followed by the longer-term 23720 measured-move projection of a potential flag pattern left behind at 20530.

Source: SpreadEx / US Tech 100

Key Takeaways

Chinese startup DeepSeek AI claims to offer equivalent performance to the world's best AI chatbots at a fraction of the cost, sending shockwaves through global markets. While the full spectrum of its capabilities has not been confirmed yet, massive investments from major tech players have raised questions, triggering a massive $1.2 trillion selloff across the US and EU markets. As more details emerge, the impact of a cost-effective AI model on the tech industry's bottom line will become clearer.