US Market: A new startup DeepSeek based in China, has created a 'sputnik moment' in the world's largest market, the US. The Chinese AI app is seen to be a formidable competitor to the world's largest AI Nvidia which is based in the USA. Nvidia is that one stock that saw a meteoric surge, taking Wall Street to new heights last year. However, DeepSeek's business module and popularity, has triggered a market rout of up to $1 trillion in US market, with tech stocks nosediving and Nvidia taking the lead in losing up to $600 billion m-cap on January 27.
US Market:
Nvidia's stock crashed by 18% and erased about $600 billion market cap - making it the single-largest fall in the history of the US market.
Panic in Nvidia was also seen in other heavyweight tech stocks. Google's parent company Alphabet lost about $99.15 billion m-cap on January 27, with stock down by 4%. Oracle nosedive by nearly 14% and lost about $71 billion m-cap. Microsoft and Tesla were also on the list with a decline of more than 2% each and eroding about $70.7 billion and $30.3 billion m-cap in single-day.
Due to this, the US market ended on an extremely bearish note except Dow Jones.
S&P 500: The index plunged by 88.96 points or 1.46% to close at 6,012.28.
Nasdaq Composite: Because of hysteria in tech stocks, Nasdaq nosedived as much as 1,000 points and even touched an intraday low of 19,204.95 during the trading session. The index ended at 19,204.95, down by 612.47 points or 3.07%.
Dow Jones: The Dow Jones Industrial Average or DJIA, however, outperformed both the S&P 500 and Nasdaq. The index closed at 44,713.58, higher by 289.33 points or 0.65%.
What Is Sputnik Moment?
The Sputnik moment is a reference to the popular panic that emerged in Western countries after the Soviet Union launched its Sputnik 1.
The Sputnik crisis was a period of public fear and anxiety in Western nations about the perceived technological gap between the United States and the Soviet Union caused by the Soviet launch of Sputnik, the world's first artificial satellite. The crisis was a significant event in the Cold War that triggered the creation of NASA and the Space Race between the two superpowers, as per Wikipedia.
Why the US Market Crashed On Monday?
Explaining the performance of the US market, Trading Economics data, US stock futures steadied on Tuesday following a sharp selloff in the previous session, particularly in artificial intelligence-related stocks, as concerns over a new AI competitor from China intensified. Chinese startup DeepSeek recently launched a free, open-source large language model that utilizes cheaper chips, less data, and lower energy consumption, sparking fears that US AI leaders could lose their competitive edge.
Further, on Monday, the S&P 500 and Nasdaq Composite tumbled 1.46% and 3.07%, respectively, with AI-focused stocks and those in the AI supply chain leading the decline. Notable drops included Nvidia (-17%), Broadcom (-17.4%), Oracle (-13.8%), Vertiv Holdings (-29.9%), and Vistra Corp (-28.3%). In contrast, the Dow gained 0.65%, buoyed by gains in defensive sectors amid falling bond yields. Investors now turn their attention to upcoming earnings reports, the latest Federal Reserve decision, and an important inflation reading later this week, Trading Economics highlighted.
How Big Of A Deal Is DeepSeek?
This Chinese artificial intelligence company was founded in 2023. Headquartered in Hangzhou, Zhejiang, China, DeepSeek released its first AI model, R1 on January 10th, which a few days later by January 27th had surpassed ChatGPT as the most-downloaded free app on the iOS App Store in the United States.
DeepSeek's accomplishment against giants like Nvidia and ChatGPT among other established rivals, is described as "upending AI" and constituting "the first shot at what is emerging as a global AI space race".
MorningStar's report said, "R1's impressive Why it matters: R1's impressive performance/cost dynamics have raised investor concerns about the necessity of the billions of dollars in capital expenditures that large US tech companies have made (and the billions more they plan to spend) on generative AI." It highlighted R1's launch and its dramatically lower pricing (more than 90% below OpenAI's latest reasoning model) go hand in hand with our broader "commodification of complements" view of the large language model space.
On the US tech stocks, MorningStar's report said, "We believe that as the price of LLMs (the complementary good) goes down, the value and usage of the public cloud vendors' primary good, cloud infrastructure, increase. To that end, we believe Amazon AMZN, Microsoft MSFT, and Google benefit from reduced LLM pricing in the long run."
Also, it added, "We maintain our fair value estimates for Microsoft ($490 per share), Amazon ($200), and Alphabet ($220), and see these wide-moat firms as benefiting from a commodified LLM layer, with increased spending on AI creating tailwinds for their public cloud businesses."
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