Stock futures took a sharp dive on Monday, driven by concerns over a potential bubble in artificial intelligence stocks. The cause? Chinese startup DeepSeek has launched a highly efficient AI model at a fraction of the cost of U.S.-based competitors, raising questions about the sustainability of the billions being funneled into AI development.
This week’s tech stock plunge fueled by AI concerns
Futures tied to the Dow Jones Industrial Average dropped 430 points, or 1%. The Nasdaq 100 futures were the hardest hit, shedding 4.5%, while S&P 500 futures tumbled 2.3%. Nvidia, a leader in AI technology, saw a premarket drop of 12%, while other major tech players like AMD, Broadcom, and Microsoft faced similar declines.
DeepSeek, a relatively new AI startup based in Hangzhou, China, released its open-source AI language model, claiming it outperformed OpenAI’s models in several tests. Launched for under $6 million, DeepSeek’s cost-effective approach is fueling fears that the U.S. AI investment cycle may be overhyped, given the massive capital allocations announced by companies like Microsoft and Meta, which are investing billions into AI development.
How to setup DeepSeek-R1 easily for free (online and local)?
DeepSeek’s model has stirred wide speculation, with some investors rethinking their positions. The company’s advanced AI excels despite utilizing cheaper chips and less data than industry-standard models. The result? A more efficient, lower-cost alternative to the massively resource-heavy AI products from U.S. giants. This development casts doubt on the trajectory of AI-driven stock growth.
Even derivative sectors tied to AI saw significant losses. Power providers like Constellation Energy and Vistra witnessed declines of 14% and 11%, respectively. The market sentiment surrounding AI is further complicated by the looming earnings reports from ‘Big Tech’ companies, including Meta, Microsoft, and Apple, and a Federal Reserve policy meeting poised to make waves in the coming week.
DeepSeek’s disruptive impact can’t be ignored. The startup’s ability to offer its AI model at a fraction of the price of leading competitors highlights the question of whether the current AI boom might be artificially inflated. What’s more, DeepSeek’s model operates under China’s stringent censorship protocols, which may undermine its credibility in some areas.
Markets will likely remain on edge as traders brace for upcoming reports and the fallout from DeepSeek’s emerging prominence in the AI space.
U.S. futures sank Monday as a Chinese startup’s cheaper AI model rattled Wall Street, triggering a steep selloff in technology shares and spurring doubts about American leadership in artificial intelligence.
Futures tumble as AI doubts rise
Dow Jones Industrial Average futures dropped around 430 points, or 1%, while the S&P 500 shed roughly 2.3%. Nasdaq 100 futures plunged 4.5%, led by losses in tech and chipmaking stocks. Another report showed the Dow off by about 380 points, reflecting volatile sentiment. Nvidia slumped as much as 12% in premarket trading, while Broadcom fell 13% and AMD slid 6%. Investors also pulled back from Microsoft, down 7%, and Meta Platforms, down 4%.
The downturn follows DeepSeek’s release of its open-source AI model, which reportedly outperforms OpenAI’s comparable system in certain benchmarks at a fraction of the cost. The startup claims its large-language model, launched last year for less than $6 million, challenges the hefty capital expenditures of U.S. tech giants. JPMorgan analyst Sandeep Deshpande noted concerns about “the huge capex announcements of Microsoft, which is spending $80bn in ’25, while Meta recently announced investments between $6bn and $65bn,” adding that DeepSeek’s resource-efficient approach “is posing thoughts to investors that the AI investment cycle may be over-hyped and a more efficient future is possible.”
Markets are also bracing for earnings from major players Apple, Tesla, Meta, and Microsoft, all scheduled to release quarterly results this week. Analysts say guidance on AI-related spending will draw particular attention in light of the DeepSeek development. Trade war worries added an extra layer of unease after President Donald Trump threatened to impose 25% tariffs on Colombian goods, then put the duties on hold following a last-minute agreement. The episode underscored concerns that the administration might resort to tariffs to achieve policy aims.
DeepSeek’s cost-cutting model stirs debate
Based in Hangzhou and spun off in March 2023 from High-Flyer Quant, DeepSeek first launched an open-source language model in November 2023. Its latest product, R1, debuted last week. The company says R1’s performance matches OpenAI’s o1 on certain tests while relying on less powerful chips, a byproduct of U.S. export controls that have forced Chinese AI startups to prioritize efficiency. Venture capitalist Marc Andreessen called R1 “AI’s Sputnik moment,” pointing to its potential to disrupt pricing in a space dominated by U.S. heavyweights.
Investors kept a close watch on the Federal Reserve, which begins its first policy meeting of 2025 on Tuesday. Most analysts expect interest rates to remain unchanged, with CMEGroup’s FedWatch Tool showing over a 99% chance of a pause. The outlook comes as all three major U.S. indexes ended last week on a positive note, marking their second-straight winning stretch. The S&P 500 hit a new intraday high on Friday after posting an all-time closing record a day earlier.
DeepSeek’s reliance on Chinese regulations has prompted scrutiny of its censorship practices. The platform reportedly refuses to discuss topics like the Tiananmen Square protests, stating such queries lie “beyond [its] current scope.” Even so, DeepSeek’s iPhone app rocketed to the top of the U.S. App Store’s free downloads on Sunday, overtaking ChatGPT.
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Featured image credit: Kerem Gülen/Ideogram
