The S&P 500 closed 1.5% lower on Monday, driven by a sell-off in the technology sector. The tech-heavy Nasdaq 100 shed 3.0%.
It comes after Chinese company DeepSeek launched a new model of its AI chatbot this month – a competitor to ChatGPT – which reportedly has lower development costs and better performance on some mathematical and logical processes.
This has challenged the idea that the US is the undisputed leader in the AI race. DeepSeek has now overtaken ChatGPT as the highest-rated free application on the US App Store.
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DeepSeek’s new model was reportedly developed for less than $6 million, compared to the $100 million or more reportedly spent on training previous models of ChatGPT. It is also an open source application, meaning the code is available to anyone to view or modify.
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This spells bad news for the US, which has been trying to control China’s advances in the AI race by restricting the type of chips that companies are allowed to export to the country. Generative AI requires enormous computing power to work, and semiconductor chips developed by companies like Nvidia facilitate this.
Rather than having the desired effect, though, the latest developments with DeepSeek suggest US restrictions have forced Chinese companies to get creative.
“The world’s leading AI companies train their chatbots using supercomputers that use as many as 16,000 chips, if not more,” the New York Times reports. “DeepSeek’s engineers, on the other hand, said they needed only about 2,000 specialized computer chips from Nvidia.”
Marc Andreessen, a Silicon Valley venture capitalist and advisor to US president Donald Trump, has described the launch of DeepSeek as “AI’s Sputnik moment”.
What is DeepSeek?
DeepSeek is an artificial intelligence chatbot, made in China and released on 20 January. Like ChatGPT, it is a large language model which answers questions and responds to prompts.
Those behind DeepSeek say the model cost significantly less to develop than its competitors. It is this efficiency that has spooked markets.
Furthermore, users have reported that DeepSeek’s performance is comparable to that of ChatGPT, and in some cases better. Our sister site Tom’s Guide compared DeepSeek and ChatGPT’s answers across a logical reasoning task, a language translation task, an ethical dilemma, and more. It declared DeepSeek the overall winner.
Despite this, reports from The Guardian and The Telegraph have flagged some concerning responses which indicate a lack of free speech around sensitive political topics.
In response to the question, “Is Taiwan a country?”, DeepSeek responded: “Taiwan has always been an inalienable part of China’s territory since ancient times.”
Why are US tech stocks selling off?
Nvidia closed 16.9% lower on Monday. The company shed almost $600 billion of its market value – the biggest one-day loss in US history.
Nvidia was the worst-hit of the US tech stocks, but Alphabet also fell more than 4% and Microsoft more than 2%.
“China's success with DeepSeek, despite sanctions, spells bad news for companies that planned to sell AI technology at a premium,” says Jochen Stanzl, chief market analyst at CMC Markets.
“Companies that relied on large server farms and costly investments in chips to maintain their competitive edge now face significant challenges,” he adds.
Stanzl says this is particularly bad for the likes of Nvidia, as the company could see less demand for its chips going forward.
Despite this, the stock has recovered slightly in pre-market trading on Tuesday, rising 5%.
How to protect your portfolio
The US technology sector has delivered wild outperformance in recent years – but it is a double-edged sword. The gains are welcome, but the concentration risk is not.
The best way to manage concentration risk is through careful diversification. This is one example of where an active fund manager could come into their own.
While a passive ETF just tracks the market, an active fund manager picks and chooses which stocks to include, weighting each position accordingly.
Before buying an active fund, you should look closely at the fund manager’s track record to see whether their performance justifies the higher fees they will charge. You might not feel it is worth it.
You should also do your research to ensure the fund manager’s investment style aligns with your objectives. Some managers will be more bullish on Big Tech than others.
Finally, remember that reducing your allocation to Big Tech could come back to bite you if the latest sell-off turns out to be little more than a blip.
Terry Smith’s Fundsmith Equity is one of the best-known active products on the market, but it has underperformed the MSCI World for four years in a row now thanks to Smith’s reluctance to invest too heavily in the Magnificent Seven.
