US tech stocks stabilized on Tuesday following a sharp decline on Monday, driven by the unexpected rise of Chinese artificial intelligence (AI) app DeepSeek.
Nvidia Rebounds After Market Shake-Up
Shares of chip giant Nvidia rebounded by 8.8% on Tuesday after plummeting on Monday, as experts suggested that the AI selloff may have been an overreaction.
The sudden market shift came as investors reassessed their positions in AI stocks after DeepSeek claimed that its model was developed at a fraction of the cost of its competitors.
Analysts noted that this development raises concerns about the future of American AI dominance and the scale of investments by US firms.
Trump Reacts to DeepSeek’s Emergence
US President Donald Trump called the event “a wake-up call” for the US tech industry but also highlighted its potential benefits.
“If you could do it cheaper, if you could do it [for] less [and] get to the same end result, I think that’s a good thing for us,” he told reporters aboard Air Force One.
Despite the disruption, Trump maintained that the US would remain a dominant force in AI innovation.
AI Boom Faces New Uncertainty
Optimism surrounding AI investments has been a major driver of the US stock market surge over the past two years, raising concerns about a potential bubble.
DeepSeek quickly became the most downloaded free app in the US just a week after its launch. Its emergence coincides with ongoing US efforts to restrict China’s access to advanced AI chip technology.
To counter these restrictions, Chinese AI developers have shared resources and explored alternative approaches, leading to models that require significantly less computing power and cost far less than previously thought. This breakthrough has the potential to disrupt the industry.
Market Reactions and Global Impact
Nvidia, which has seen its stock soar over the last two years due to rising AI demand, suffered the biggest hit on Monday, with shares dropping 17%, wiping nearly $600 billion off its market value.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said investors often sell first when faced with uncertainty. However, she predicted that companies like Apple could ultimately benefit if AI development becomes more cost-effective. Other tech giants facing scrutiny over high AI-related expenditures might also see long-term advantages.
Following Monday’s turmoil, US stock markets showed stability on Tuesday. The Dow Jones Industrial Average closed 0.3% higher, the S&P 500 rose by nearly 1%, and the tech-heavy Nasdaq gained 2%. The UK’s FTSE 100 also finished 0.35% higher.
In Asia, shares of Japanese AI-related firms, including Advantest, Softbank, and Tokyo Electron, fell sharply, dragging the Nikkei 225 down by 1.4%. Several Asian markets remained closed for the Lunar New Year holiday, with Mainland China’s financial markets set to reopen on February 5.
Who Founded DeepSeek?
DeepSeek was founded in 2023 by Liang Wenfeng in Hangzhou, China. The 40-year-old, an information and electronic engineering graduate, also founded the hedge fund that backed the company. He was recently seen at a meeting between industry experts and Chinese Premier Li Qiang.
In a July 2024 interview with The China Academy, Liang expressed surprise at the response to his AI model’s pricing. “We didn’t expect pricing to be such a sensitive issue,” he said. “We were simply following our own pace, calculating costs, and setting prices accordingly.”
DeepSeek’s Disruptive Potential
DeepSeek-R1, launched earlier this month, claimed “performance on par with” OpenAI’s latest models in tasks like mathematics, coding, and natural language processing.
OpenAI CEO Sam Altman called it “an impressive model, particularly around what they’re able to deliver for the price,” though he asserted that OpenAI would continue producing superior models.
“DeepSeek’s ability to rival US models despite limited access to advanced hardware demonstrates that software ingenuity and data efficiency can compensate for hardware constraints,” said Marina Zhang, an associate professor at the University of Technology Sydney.
Ion Stoica, co-founder and executive chair of AI software company Databricks, suggested that DeepSeek’s lower costs could drive wider AI adoption. “If that happens, this reduction in cost can accelerate the progress of AI,” he said. “So overall, the market will expand faster, and the value of the market will grow faster.”
DeepSeek claims its model can be trained on just 2,000 specialized chips, compared to an estimated 16,000 required by leading AI models.
Skepticism and Cybersecurity Concerns
Despite its rapid rise, DeepSeek’s claims have been met with skepticism. Tech billionaire Elon Musk responded to a post suggesting DeepSeek actually possesses 50,000 Nvidia chips—now banned from export to China—by simply stating: “Obviously.”
The app’s surge in popularity has also raised cybersecurity concerns. In Australia, Science Minister Ed Husic urged caution, telling ABC: “There are a lot of questions that will need to be answered in time on quality, consumer preferences, data, and privacy management.”
As the AI landscape continues to evolve, the impact of DeepSeek’s breakthrough—and the response from US tech giants—will be closely watched in the coming weeks.
