(Jan 27): Chinese artificial intelligence (AI) startup DeepSeek’s latest AI model sparked a US$1 trillion (RM4.38 trillion) rout in US and European technology stocks, as investors questioned bloated valuations of some of America’s biggest companies.

DeepSeek’s latest AI model rose to the top of Apple’s App Store charts over the weekend, presenting a visible challenge to costlier models like OpenAI and raising questions over the hundreds of billions in planned spending on the technology by the likes of Microsoft Corp, Meta Platforms Inc and Alphabet Inc. 

It also put a spotlight on AI chip producer Nvidia Corp, whose shares soared ninefold in the past two years, making it the highest-valued company in the world. The Santa Clara, California-based firm slid more than 10% in pre-market trading on Monday — a drop that would zap about US$340 billion in market value if it were to hold in the cash session.

Nasdaq 100 futures tumbled as much as 5.2% in overnight trading before paring the loss to 3.5% as of 8.30am in New York. That marked the biggest intraday drop for the contracts since August. In Europe, tech stocks led market losses, with shares of chip equipment maker ASML Holding NV down as much as 12%. The Cboe Volatility Index, known as the VIX, surged to 21.5. The Nasdaq 100 and Europe’s Stoxx 600 technology sub-index were together set for a market capitalisation wipeout of US$1.2 trillion, if the losses hold.

“DeepSeek shows that it is possible to develop powerful AI models that cost less,” said Vey-Sern Ling, the managing director of Union Bancaire Privee. “It can potentially derail the investment case for the entire AI supply chain, which is driven by high spending from a small handful of hyperscalers.”

The rout in Nasdaq futures comes at the start of a big week for earnings from major tech companies including Apple and Microsoft. Profit growth is expected to have slowed while valuations remain inflated, once again causing concern over the large AI-driven rally in the sector.

Roughly 278,000 Nasdaq 100 futures contracts changed hands by 6.18am New York time, about three times more than the 30-day average for this time of day, according to data compiled by Bloomberg.

The AI model from DeepSeek — founded by quant fund chief Liang Wenfeng — is widely seen as competitive with OpenAI and Meta’s latest offerings. Lauded by investor Marc Andreessen as “one of the most amazing and impressive breakthroughs”, DeepSeek’s app shows its work and reasoning as it addresses a user’s written query or prompt. Released last week, the product is now at the top of Apple’s App Store rankings, with users praising its transparency.

Chinese AI-related stocks reacted positively, with mainland-listed Merit Interactive Co among those surging by their daily limits. Merit is among those with the clearest links to DeepSeek after stating in an earlier filing that it had incorporated the home-grown AI firm’s model into marketing. In Hong Kong, the Hang Seng Tech Index climbed as much as 2% ahead of Lunar New Year holidays this week.

AI trades slumped elsewhere as investors rethought assumptions of computing power and energy. Siemens Energy AG, one of the few AI winners in Europe, slid 22%.

The DeepSeek product “is deeply problematic for the thesis that the significant capital expenditure and operating expenses that Silicon Valley has incurred is the most appropriate way to approach the AI trend", said Nirgunan Tiruchelvam, the head of consumer and internet at Singapore-based Aletheia Capital. “It calls into question the massive resources that have been dedicated to AI.”

The Nasdaq 100 is trading at 27 times estimated forward earnings, compared with its three-year average of 24 times. Nvidia is at 33 times, though that’s slightly down from its three-year average.

The DeepSeek release raises new doubts, challenging the notion that China’s AI technology is years behind US counterparts. Washington’s trade restrictions had kept the most cutting-edge chips out of China’s hands, but DeepSeek’s model was built using open source technology that is easy to access.

“While current leaders like Nvidia have a strong foothold, it is a reminder that AI dominance cannot be taken for granted,” said Charu Chanana, the chief investment strategist of Saxo Markets. “The emergence of China’s DeepSeek indicates that competition is intensifying, and although it may not pose a significant threat now, future competitors will evolve faster and challenge the established companies more quickly. Earnings this week will be a huge test.”

Read also:
Nvidia’s US$465b DeepSeek plunge is largest in market history
China’s DeepSeek tops iPhone downloads and spurs Asia stocks

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