NEW YORK — The excitement surrounding Wall Street’s tech industry saw a sudden decline on Monday, primarily fueled by news of competition from China in the artificial intelligence sector. The S&P 500 index plummeted by 1.9% around midday, indicating it was on track for its worst performance in over a month. Significant losses were recorded among prominent technology companies, with Nvidia experiencing a staggering drop of 17.6%, which dragged the Nasdaq composite down by 3.3%.
In contrast, stocks in sectors not related to AI fared better, with the Dow Jones Industrial Average showing only a minor decrease of 58 points, equivalent to 0.1%, as observed around 11:40 a.m. Eastern time. The Dow, which has a lesser focus on technology compared to the S&P 500 and Nasdaq, had even shown a brief uptick earlier in the day.
The catalyst for this market upheaval was a statement from DeepSeek, a Chinese company, which announced the development of a competitive large language model at a substantially reduced cost compared to U.S. counterparts. By Monday morning, DeepSeek’s app had surged to the top of Apple’s App Store charts, which analysts regarded as a remarkable achievement, especially considering the U.S. government’s restrictions on Chinese access to advanced AI chips.
Despite the significant announcement from DeepSeek, skepticism persisted regarding its potential impact on the AI supply chain, specifically concerning chip manufacturers and utility companies that supply power to extensive data centers reliant on immense computational capabilities. Dan Ives, an analyst from Wedbush Securities, pointed out, “It remains to be seen if DeepSeek found a way to work around these chip restrictions and what chips they ultimately used, as there will be plenty of skeptics around this issue given the information is coming from China.”
Nonetheless, DeepSeek’s news created considerable turmoil for AI-related stocks globally. In Amsterdam, the Dutch chip manufacturer ASML saw a decline of 7.4%. Meanwhile, Japan’s Softbank Group Corp. dropped 8.3%, moving closer to pre-announcement levels following a White House-backed partnership to invest nearly $500 billion in AI infrastructure. On Wall Street, shares of Constellation Energy fell nearly 19.5%, reflecting investor concern as the company announced plans to reactivate the closed Three Mile Island nuclear facility to provide power to Microsoft data centers.
As a result of these fluctuations, investors turned to bonds, typically considered more secure than stocks. This shift caused the yield on the 10-year Treasury bill to decrease from 4.62% to 4.54%, a notable development amidst the turmoil.
The recent developments mark a sharp turnaround for AI companies, which had experienced massive gains over the past few years, bolstered by optimistic projections of sweeping changes to the global economy and substantial profits. Prior to Monday’s downturn, Nvidia’s stock had surged from under $20 to more than $140 in just two years.
Additionally, other major technology firms also benefitted from the AI trend. Just last Friday, Meta Platforms’ CEO Mark Zuckerberg stated that the company intends to invest as much as $65 billion this year and expand its AI teams significantly while discussing plans for a massive data center in Louisiana, covering a substantial area of land.
This small group of leading companies is often referred to as the “Magnificent Seven,” which includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Collectively, they contributed to over half of the S&P 500’s total returns last year, according to S&P Dow Jones Indices. Their considerable market presence also allows them to wield significant influence over the S&P 500 and other indices that favor larger corporations. However, this concentration can pose risks, as highlighted by financial experts who refer to it as “concentration risk.” Brian Jacobsen, chief economist at Annex Wealth Management, explained that while relying on a few rising stars can be rewarding, it becomes increasingly perilous amid market disruptions.
Despite the day’s drops, Jacobsen cautioned against hasty reactions, suggesting that the news from China could be overblown and potentially lead to a market recovery. He added that even if the reports are accurate, they could create new investment prospects.
Future volatility appears likely, as several major companies, including Apple, Meta Platforms, Microsoft, and Tesla, are preparing to disclose their profit figures for 2024 later this week. The pressure on these businesses to sustain strong earnings is particularly acute following recent increases in Treasury yields, which generally depresses stock prices when bonds offer higher interest rates. So far, major U.S. firms have largely surpassed analyst expectations despite Monday’s decline, with AT&T being the latest to report positive results, driving its stock price up by 6%.
In international markets, the reactions were not as extreme as those experienced by large U.S. tech firms. France’s CAC 40 index dipped by 0.2% and Germany’s DAX fell by 0.5%. In Asian markets, shares in Shanghai edged down by 0.1% as a report indicated that China’s export orders among manufacturers had fallen to a five-month low. Meanwhile, the Federal Reserve is set to hold its latest policy meeting this week, with traders anticipating that recent weaker economic data will not push the Fed to lower its primary interest rate; most expect the central bank will maintain its current rates, as indicated by recent data.
