China’s DeepSeek AI startup has caused a stir in global markets after unveiling its cost-efficient artificial intelligence model, which threatens to rival U.S. giants like OpenAI. The company claims that its model, which can compete with established AI technologies, costs under $6 million to develop and requires significantly less computing power—a key asset from companies like Nvidia and Broadcom.
At the U.S. stock market open, Wall Street reacted negatively to the news, especially with semiconductor companies facing steep declines. Nvidia’s shares fell by 13.58%, and Broadcom dropped by 13.06%. Other chipmakers like Micron and AMD also saw significant losses, fueling doubts about the U.S.’s competitive edge in AI.
Industry experts are starting to reassess the broader implications of this breakthrough. Marc Andreessen, a prominent venture capitalist, called the DeepSeek model one of the “most amazing and impressive breakthroughs” he’s witnessed, while CMC Markets’ Jochen Stanzl noted how DeepSeek shows that high-performing AI could soon be within reach for anyone, even for free.
“DeepSeek’s model suggests that the massive costs usually associated with AI development might not be necessary, posing a serious challenge to U.S.-dominated AI firms,” said Edison Lee, analyst at Jefferies.
What Is DeepSeek?
DeepSeek was founded in May 2023, specializing in the development of open-source large language models (LLMs). Based in Hangzhou, Zhejiang, and led by 40 year old Liang Wenfeng, the company is fully funded by the hedge fund High-Flyer, which Liang co-founded in 2016. High-Flyer initially focused on AI-powered trading algorithms before expanding into AI research in 2023. DeepSeek’s main objective is to create affordable AI models, with the company becoming well-known for launching cost-efficient models that challenged the pricing structure of established AI giants like ByteDance, Tencent, and Alibaba.
DeepSeek made a significant impact in 2024 with the release of DeepSeek-V2, a model that offered strong performance at a lower cost, prompting a price war in the AI industry. By December 2024, DeepSeek-V3 was launched, boasting 671 billion parameters and outperforming competitors while using fewer resources. This breakthrough model, trained on a vast dataset, gained attention for its competitive performance and was recognized for challenging the U.S.’s global dominance in AI.
The company has no immediate plans for commercialization but focuses heavily on AI research and development. Its hiring strategy prioritizes technical skills over experience, attracting recent graduates and emerging developers. DeepSeek’s innovations, particularly with its resource-efficient models, have sparked discussions about the effectiveness of U.S. export restrictions on AI technology to China.
With AI market spending set to grow, DeepSeek’s success could reshape how U.S. tech companies approach their AI investments, potentially slowing the expected growth trajectory for AI spending in the years ahead.
Stock Markets Take a Hit
Following the DeepSeek news, major U.S. stock indexes took a dive. The S&P 500 fell by 1.61%, and the tech-heavy Nasdaq dropped by 2.77%. At the same time, the Dow Jones Industrial Average slipped by 0.1%. Investors seem to be bracing for uncertainty in the wake of DeepSeek’s breakthrough, with fears over potential disruptions in AI market dynamics.
The Magnificent Seven under Scrutiny
This week, all eyes will be on the earnings reports from the largest U.S. tech companies, known as the “Magnificent Seven” (Meta, Microsoft, Tesla, Apple, Amazon, Alphabet, and Nvidia). These companies have driven much of the market’s growth in recent years, and their performance could set the tone for future market trends.
With DeepSeek making waves, market experts believe this week’s earnings reports will be critical in determining whether these tech giants can maintain their competitive edge or if new players like DeepSeek are set to challenge their dominance.
The U.S. Federal Reserve’s meeting this week is drawing attention, especially as analysts predict that recent market movements could influence future rate decisions. Some speculate that a stock market correction could prompt the Fed to cut interest rates, with further pressure likely to come from President Trump’s stance on economic policy. Meanwhile, Bitcoin also experienced a slight drop, falling by 0.69%, as investors became more cautious in the wake of market uncertainty.
The landscape of AI and tech is evolving rapidly, and the U.S. may face increasing competition from global players like China. The next few weeks will reveal whether DeepSeek’s AI model will be a game-changer for the industry or just another short-term disruption in the ever-shifting tech market.
