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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.

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Activity levels across India’s private sector are seeing a modest uptick this month, even as cost pressures have surged to a 16-month high for both services and manufacturing players, compelling them to raise prices charged to customers at a pace not seen since February 2013, as per the HSBC Flash India Purchasing Managers’ Index (PMI).

However, manufacturing sector growth slipped lower this month, while services growth ticked upwards. The Flash PMI is an early economic indicator for an ongoing month, based on 80% to 90% of responses to a private survey of purchasing managers across 400-odd companies in manufacturing and services sectors conducted by S&P Global Market Intelligence.

The HSBC Flash India Composite Output Index, that combines responses from services firms and goods producers, rose to 59.5 in November, a three-month high, from a final PMI reading of 59.1 in October. PMI readings of more than 50 indicate an expansion in activity.

HSBC Flash India Manufacturing PMI cooled to 57.3 in November, marginally lower than October’s 57.5 reading. However, compared with services providers, goods producers saw a faster upturn in new orders for the third straight month amid strong demand conditions and rising export orders.

The uptick in new business bolstered this month’s job creation among surveyed services firms to the highest level recorded since this data became available in December 2005.

Also read | A picture of a growing economic divide in India

However, inflation crimped the upside as manufacturers reported higher prices for a range of raw materials, including aluminium, cotton, leather and rubber, while services firms weighed in on greater food costs, particularly for cooking oils, eggs, meat and vegetables, and higher wage bills.

“In response to rising operating costs, private sector companies in India hiked their selling charges again during November. The rate of inflation was sharp and the fastest in just under 12 years. Firms suggested that demand strength allowed them to pass on additional cost burdens to their clients,” S&P Global noted.

November’s initial PMI findings also indicate a rebound in business confidence levels, with firms’ expectations on future output at a six-month peak.

“India’s flash composite PMI moderately expanded from a final reading of 59.1 in October to 59.5 this month. Services saw a pick-up in growth, while the manufacturing sector managed to outperform expectations despite a marginal slowdown from its October final PMI reading. Meanwhile, price pressures are rising for raw materials used by manufacturers, as well as food and wage costs in the services sector,” said Pranjul Bhandari, chief India economist at HSBC.

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Manufacturing firms’ order books and output levels expanded at the fastest pace in nearly three years this August, as per the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) that rose to 58.6 last month from 57.7 in July. 

A reading of over 50 on the index reflects growth in activity levels and August was the 26^th month in a row that the PMI score was above 50.   

Though input costs escalated, firms replenished their inventories at the second highest pace in 18-and-a-half years and restrained from hiking selling prices in tandem with higher costs. Firms raised output costs at the slowest pace in four months, though input costs rose at the fastest pace in a year. 

New orders grew at the fastest pace since January 2021, with export demand seeing the sharpest uptick since November last year. Firms surveyed for the index reported that they had secured new work from clients in Bangladesh, China, Malaysia, Singapore, Taiwan and the U.S. 

To cope with the additional work flow, Indian manufacturers reportedly hired a combination of permanent and temporary staff on both part- and full-time bases. However, overall employment grew at the slowest pace in four months. 

“The presence of stronger cost inflationary pressures serves as a reminder of the challenges inherent in managing growth. Firms addressed rising input prices by lifting selling charges. However, the need to maintain competitiveness helped restricted charge inflation,” noted Pollyanna De Lima, economics associate director at S&P Global Market Intelligence. 

With the manufacturing PMI painting a vibrant picture of the sector in August, Ms. De Lima reckoned the sector looks set to provide a strong contribution to economic growth in the second quarter of 2023-24. Manufacturing GVA (Gross Value Added) grew 4.7% in the first quarter (April to June 2023) as per estimates released by the National Statistical Office on August 31.

“Companies’ strategic focus towards a global orientation were evident via a sharp and quicker expansion in international sales. Export-centric tactics should help ensure that production remains on an upward path in the coming months,” Ms. De Lima said.