What the heck was that? Oh, nothing. It was just an infant artificial intelligence meteorite from China named DeepSeek that wiped out more than $1 trillion in value on Wall Street. The US financial markets are taking another look at their calculations to determine if they might have forgotten to carry the one when estimating their future AI investments since the ChatGPT craze that began three years ago.
DeepSeek Triggers Deep Losses
DeepSeek, established in 2023 by a hedge fund, ignited a frenzy on Wall Street and Silicon Valley during the Jan. 27 trading session. The Chinese tech startup developed an AI model comparable to the ones manufactured by Google, Meta, OpenAI, and the scores of other platforms. In some cases, DeepSeek performed as well as these creations on tasks like natural language reasoning and coding. In some other instances, the company outperformed its US competitors.
For industry observers, this was almost an inevitability. However, what took institutional and retail traders by surprise was how DeepSeek accomplished this feat. The open-source large language model was made at a fraction of the cost of the American alternatives. Additionally, it was developed with fewer employees and less energy (more on this later).
Known for its casual panic attack, the tech side of the financial markets furiously hit the sell button. The Nasdaq Composite Index declined 612.47 points, or 3.07%, to 19,341.83. The S&P 500 slumped 88.96 points, or 1.46 percent, to 6,012.28. The blue-chip Dow Jones Industrial Average was spared from the market rout, rising nearly 300 points, or 0.65%, to $44,713.58. Investors sought shelter in government bonds, sending US Treasury yields into an ocean of red ink.
Nvidia, the AI chipmaker and industry kingpin, wiped out approximately $600 billion in market value after shares crashed 17%. This was the largest one-day loss in US history. Other related stocks joined the selloff, including Advanced Micro Devices, Broadcom, Marvell Technology, Oracle, and Super Micro Computer.
Was this a knee-jerk reaction? Some of the best in the business certainly think so. But while this could be an isolated event priced in by the forward-looking bulls and bears on the New York Stock Exchange, DeepSeek’s success could present vast implications for the United States – good and bad.
The Good, the Bad, and the Ugly
First, the good. When DeepSeek caused investors to reach for the Pepto Bismol, energy commodities plummeted. West Texas Intermediate (WTI) crude oil, the US benchmark for oil prices, slumped by $1.49, or 2%, to $73.17 per barrel on the New York Mercantile Exchange. Natural gas prices cratered more than 8% to kick off the trading week at $3.70 per million British thermal units (Btu). The sharp losses were triggered by expectations that perhaps AI will not require such enormous power demand as many had anticipated. Remember, natural gas has soared as much as 30% over the last three months, buoyed, in part, by expected AI-related energy consumption. In many ways, this is positive news for President Donald Trump’s pledge to lower price inflation.
Second, the bad. In the past year, a meme was born: America innovates, Europe regulates, and China replicates. Up until Jan. 27, the United States had been at the front of the AI arms race. Big Tech had ostensibly zapped the competition, whether constructing massive AI models to creating advanced generative AI platforms. This might be about to change, especially if reports are accurate that DeepSeek only spent $5.6 million over two months to develop its latest AI model.
"This might be bad news for the Magnificent 7 that had plans to dominate the AI market with their expensive AI services," said eminent economist Ed Yardeni in a note. "The question is whether they will disappoint because their capital spending on AI is soaring faster than are their revenues. That could squeeze their collective profit margin."
The next series of earnings reports from the likes of Nvidia, Microsoft, and Meta will be must-see entertainment.
Third, the ugly. DeepSeek surpassed ChatGPT on the Apple App Store. In other words, the Chinese AI service has become incredibly popular among US users. This is nothing new, considering TikTok has been a premier social media outlet for years. Like TikTok, the problem is that the company admits it collects personal data from users: IP addresses, keystroke patterns, device information, system language, and performance logs. When something is free, the user is the product.
‘A Wakeup Call’
President Donald Trump says DeepSeek should push the US tech industry to stop and smell the coffee. "The release of DeepSeek AI from a Chinese company should be a wakeup call for our industries that we need to be laser-focused on competing to win. Because we have the greatest scientists in the world,” he said at the GOP retreat in Florida. Indeed, the little-known AI service took the world by storm in just 24 hours, and if the headlines were accurate, the sector might have transitioned into the next gear.
The jobs from ChatGPT, Veo, and Claude may have, ironically, been replaced by another AI.
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