Bloomberg on Monday reported that Chinese artificial intelligence startup DeepSeek has shaken global technology markets, raising concerns about the future of America's technological dominance. The company unveiled a revolutionary AI model that delivers powerful performance while operating on less-advanced chips, challenging the high-cost infrastructure central to US tech firms like Nvidia. This breakthrough has been widely regarded as a game-changer, showcasing that cutting-edge AI can be achieved without heavy reliance on top-tier hardware.

Shares of Nvidia Corp., which has been a leader in the AI boom, plunged by 10% in premarket trading, reflecting market anxiety over the potential disruption to its business model. Meanwhile, Nasdaq 100 futures dropped 3.4%, and S&P 500 futures declined 2%, signaling widespread market turbulence. Europe's tech sector also took a hit, with ASML Holding NV dropping 11%. The Stoxx 600 technology sub-index braced for a combined loss of $1 trillion in market capitalization if the trends persist.

"DeepSeek shows that it is possible to develop powerful AI models that cost less," said Vey-Sern Ling, managing director at 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."

DeepSeek Challenges US AI Leadership

Founded by quant fund expert Liang Wenfeng, DeepSeek has rapidly positioned itself as a major player in artificial intelligence, rivaling offerings from OpenAI and Meta Platforms Inc. DeepSeek's model has been praised for its transparency and reasoning capabilities, showcasing its thought process as it addresses user queries.

The product, which debuted last week, quickly became the top-ranked app on Apple's App Store, with users applauding its intuitive design and cost-effectiveness. Investor Marc Andreessen described the achievement as "one of the most amazing and impressive breakthroughs."

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Despite US trade restrictions limiting China's access to cutting-edge chips, DeepSeek developed its model using open-source technology and less-advanced hardware, challenging the notion that AI dominance depends on cutting-edge infrastructure.

This achievement has exposed potential flaws in the massive financial investments made by companies like Nvidia and reinforced doubts about Silicon Valley's ability to maintain its lead.

Market Shockwaves

The release of DeepSeek's model has had immediate global repercussions:

• Nasdaq futures saw a massive uptick in trading, with over 200,000 contracts exchanged by 4:45 a.m. in New York—four times the average volume for that time.
• Chinese stocks tied to AI, such as Merit Interactive Co., surged to their daily limits, while the Hang Seng Tech Index climbed 2%.
• In contrast, European and U.S. AI-related companies faced sharp declines. Siemens Energy AG, one of Europe's AI-linked firms, dropped 20%.

These developments have cast doubts on the high capital expenditures driving the US AI boom. Nirgunan Tiruchelvam, head of consumer and internet research at Aletheia Capital, noted, that 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. It calls into question the massive resources that have been dedicated to AI."

Read more: China's R&D investment soars with record growth in 2024

DeepSeek's success reveals a growing competitiveness in China's AI ecosystem, previously thought to lag behind Silicon Valley. The achievement demonstrates that technological innovation can thrive under resource constraints, undermining the assumption that China's access to advanced hardware would hinder its progress.

As Charu Chanana, chief investment strategist at Saxo Markets, explained, "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."

A Critical Week for Tech Giants

The timing of DeepSeek's breakthrough coincides with a critical earnings week for major tech players like Apple and Microsoft, further amplifying market concerns. The Nasdaq 100's valuation, currently at 27 times estimated forward earnings, exceeds its three-year average of 24 times, while Nvidia trades at 33 times forward earnings.

DeepSeek's success has forced investors and industry leaders to reevaluate their assumptions about what drives AI innovation. The question is no longer whether US companies can maintain their dominance but how they will adapt to a competitive landscape that is rapidly shifting toward cost-effective alternatives.