DeepSeek's 'Sputnik moment' sparks rout in AI-linked stocks

Investors hammered technology stocks on Monday, sending the likes of Nvidia and Oracle plummeting, as the emergence of a low-cost Chinese artificial intelligence model cast doubts on dominance of US companies in this sector.

Startup DeepSeek last week launched a free assistant it says uses less data at a fraction of the cost of incumbent players' models, possibly marking a turning point in the level of investment needed for AI.

Tech-heavy Nasdaq slid 3.1percent, while the S&P 500 dropped 1.8percent.

Dominant AI chipmaker Nvidia slumped 11 percent in early trading, leading losses among heavyweight tech stocks that had powered Wall Street's main indexes to record levels. Microsoft shares tumbled 3.8 percent, Meta Platforms 3.1 percent and Alphabet 3.3 percent.

DeepSeek, which by Monday had overtaken US rival ChatGPT in terms of Apple Store downloads, offers the prospect of a viable, cheaper AI alternative, raising questions on the heavy spending by US companies such as Apple and Microsoft, amid growing investor push for returns.

From Tokyo to Amsterdam, shares in AI players tumbled.

"We still don't know the details and nothing has been 100 percent confirmed in regards to the claims, but if there truly has been a breakthrough in the cost to train models from US$ 100 million+ to this alleged US$ 6 million number this is actually very positive for productivity and AI end users as cost is obviously much lower meaning lower cost of access," Jon Withaar, a senior portfolio manager at Pictet Asset Management, said.

The hype around AI has powered a huge inflow of capital into the equity markets in the last 18 months, as investors bought into the technology, inflating company valuations and lifting stock markets to new highs.

Little is known about the small Hangzhou startup behind DeepSeek. Its researchers wrote in a paper last month the DeepSeek-V3 model, launched on January 10, used Nvidia's H800 chips for training, spending less than US$6 million - the figure referenced by Pictet's Withaar.

H800 chips are not top of the line. Initially developed as a reduced-capability product to get around curbs on sales to China, they were subsequently banned by US sanctions.

'Sputnik moment'

Marc Andreessen, the Silicon Valley venture capitalist, said in a post on X on Sunday that DeepSeek's R1 model was AI's "Sputnik moment", referencing the former Soviet Union's launch of a satellite that marked the start of the space race in the late 1950s.

"DeepSeek R1 is one of the most amazing and impressive breakthroughs I've ever seen – and as open source, a profound gift to the world," he said in a separate post.

In Europe, ASML dropped almost 7.5 percent, while Siemens Energy lost nearly 18 percent.

In Japan, startup investor SoftBank Group slid more than 8percent. Last week it announced a US$ 19 billion commitment to fund Stargate, a data-centre joint venture with OpenAI.

Given the volatility, investors sought out safe-havens such as US Treasuries, which pushed 10-year yields down slumped to 4.52 percent , while low-yielding currencies like the Japanese yen and the Swiss franc soared against the dollar.

Big Tech has ramped up spending on developing AI capabilities and optimism over the possible returns has driven stock valuations sky-high.

Nvidia has risen more than 200 percent in about 18 months and trades at 56 times the value of its earnings, compared with a 53 percent rise in the Nasdaq, which trades at a multiple of 16 to the value of its constituents' earnings, LSEG data showed.

Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore, said the market was questioning the capex spend of the major tech companies.

Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management said: "The idea that the most cutting-edge technologies in America, like Nvidia and ChatGPT, are the most superior globally, there's concern that this perspective might start to change."

"I think it might be a bit premature," Ichikawa said.

Among other stocks, Vertiv Holdings that builds data center infrastructure slumped 18 percent. Power companies, expected to benefit from a surge in demand from power-hungry data centers needed to develop AI technology, were down in double digits. Constellation Energy and Vistra fell 15 percent and 20 percent, respectively.