Deepseek logo.
| Photo Credit: Reuters

The S&P 500 and the Nasdaq dropped on Monday (January 27, 2025), as the surging popularity of a low-cost Chinese artificial intelligence model knocked shares of chipmaker Nvidia and other companies benefiting from investments into the technology.

Chinese startup DeepSeek has rolled out a free assistant it says uses cheaper chips and less data, seemingly challenging a widespread bet in financial markets that AI will drive demand along a supply chain from chipmakers to data centers.

DeepSeek’s AI Assistant on Monday overtook rival ChatGPT to become the top-rated free application available on Apple’s App Store in the United States.

Explained | What is DeepSeek, and why is it disrupting the AI sector?

“It’s clearly not good for ChatGPT to have an aggressive competitor, but we don’t buy the thesis that this is going to tank the demand for high-end GPUs,” said Infrastructure Capital Advisors CEO Jay Hatfield, referring to the advanced semiconductors needed to run AI applications.

AI chip leader Nvidia’s shares slumped 15.1%, while a gauge of semiconductor stocks slid 8.2%, heading for its worst single-day drop since March 2020.

Microsoft and Google-parent Alphabet fell 3.8% and 2.8%, respectively, while AI server makers Dell Technologies and Super Micro Computer skid 8.6% and 11.1%.

Power companies, which are expected to see a surge in demand from energy-intensive data centers needed to develop AI technology, also came under pressure. Vistra and GE Vernova tumbled 27.9% and 19.7%, respectively.

Data center operators also tanked, with Digital Realty sliding 12.9%.

At 11:21 a.m. ET, the Dow Jones Industrial Average fell 43.01 points, or 0.10%, to 44,381.24, the S&P 500 lost 107.59 points, or 1.76%, to 5,993.65 and the Nasdaq Composite declined 589.56 points, or 2.95%, to 19,364.74.

The Cboe Volatility Index, known as Wall Street’s “fear gauge”, hit its highest since Dec. 20, last up 4.2 points at 19.05.

Bucking the wider trend, AT&T rose 5.3% to an over three-year high after its fourth-quarter wireless subscriber growth surpassed expectations.

Defensive sectors such as health care and consumer staples also escaped the gloom, up more than 1.5% each.

Big Tech will remain in focus, as Microsoft, Meta, Apple and Tesla – four out of the “Magnificent 7” companies that powered the bulk of last year’s gains – are set to report quarterly numbers later this week.

Global markets were also on edge as the U.S. and Colombia pulled back from the brink of a trade war on Sunday after the White House said the South American nation had agreed to accept military aircraft carrying deported migrants.

Also Read | Chinese AI firm DeepSeek unveils open-source reasoning model DeepSeek-R1; beats OpenAI’s o1

On the economic radar, the U.S. Federal Reserve is widely expected to hold its lending rate steady in its first interest-rate decision of the year due on Wednesday, while the December reading of the personal consumption expenditures (PCE) is scheduled for Friday.

Advancing issues outnumbered decliners by a 1.06-to-1 ratio on the NYSE and declining issues outnumbered advancers by a 1.19-to-1 ratio on the Nasdaq.

The S&P 500 posted 24 new 52-week highs and no new lows while the Nasdaq Composite recorded 48 new highs and 64 new lows.

Deepseek logo is seen in this illustration taken January 27, 2025.
| Photo Credit: Reuters

Chinese startup DeepSeek’s launch of its latest AI models, which it says are on a par or better than industry-leading models in the United States at a fraction of the cost, is threatening to upset the technology world order.

The company has attracted attention in global AI circles after writing in a paper in December 2024 that the training of DeepSeek-V3 required less than $6 million worth of computing power from Nvidia H800 chips.

DeepSeek’s AI Assistant, powered by DeepSeek-V3, has overtaken rival ChatGPT to become the top-rated free application available on Apple’s App Store in the United States.

This has raised doubts about the reasoning behind some U.S. tech companies’ decision to pledge billions of dollars in AI investment and shares of several big tech players, including Nvidia, have been hit.

Some facts about the company shaking up the AI sector worldwide:

Why is DeepSeek causing a stir?

The release of OpenAI’s ChatGPT in late 2022 caused a scramble among Chinese tech firms, who rushed to create their own chatbots powered by artificial intelligence.

But after the release of the first Chinese ChatGPT equivalent, made by search engine giant Baidu, there was widespread disappointment in China at the gap in AI capabilities between U.S. and Chinese firms.

The quality and cost efficiency of DeepSeek’s models have flipped this narrative on its head. The two models that have been showered with praise by Silicon Valley executives and U.S. tech company engineers alike, DeepSeek-V3 and DeepSeek-R1, are on par with OpenAI and Meta’s most advanced models, the Chinese startup has said.

They are also cheaper to use. The DeepSeek-R1, released last week, is 20 to 50 times cheaper to use than OpenAI o1 model, depending on the task, according to a post on DeepSeek’s official WeChat account.

But some have publicly expressed scepticism about DeepSeek’s success story.

Scale AI CEO Alexandr Wang said during an interview with CNBC on January 23, 2025, without providing evidence, that DeepSeek has 50,000 Nvidia H100 chips, which he claimed would not be disclosed because that would violate Washington’s export controls that ban such advanced AI chips from being sold to Chinese companies. DeepSeek did not immediately respond to a request for comment on the allegation.

Bernstein analysts on Monday (January 27, 2025) highlighted in a research note that DeepSeek’s total training costs for its V3 model were unknown but were much higher than the $5.58 million the startup said was used for computing power. The analysts also said the training costs of the equally-acclaimed R1 model were not disclosed.

Who is behind DeepSeek?

DeepSeek is a Hangzhou-based startup whose controlling shareholder is Liang Wenfeng, co-founder of quantitative hedge fund High-Flyer, based on Chinese corporate records.

Mr. Liang’s fund announced in March 2023 on its official WeChat account that it was “starting again”, going beyond trading to concentrate resources on creating a “new and independent research group, to explore the essence of AGI” (Artificial General Intelligence). DeepSeek was created later that year.

ChatGPT makers OpenAI define AGI as autonomous systems that surpass humans in most economically valuable tasks.

It is unclear how much High-Flyer has invested in DeepSeek. High-Flyer has an office located in the same building as DeepSeek, and it also owns patents related to chip clusters used to train AI models, according to Chinese corporate records.

High-Flyer’s AI unit said on its official WeChat account in July 2022 that it owns and operates a cluster of 10,000 A100 chips.

How does Beijing view DeepSeek?

DeepSeek’s success has already been noticed in China’s top political circles. On January 20, 2025, the day DeepSeek-R1 was released to the public, Mr. Liang attended a closed-door symposium for businessman and experts hosted by Chinese premier Li Qiang, according to state news agency Xinhua.

Mr. Liang’s presence at the gathering is potentially a sign that DeepSeek’s success could be important to Beijing’s policy goal of overcoming Washington’s export controls and achieving self-sufficiency in strategic industries like AI.

A similar symposium in 2024 was attended by Baidu CEO Robin Li.