US tech stocks stabilized on Tuesday after experiencing a sharp decline on Monday due to the sudden rise of Chinese-made artificial intelligence (AI) app DeepSeek.
Shares in chip manufacturer Nvidia rebounded by 8.8%, following Monday’s slump, as analysts suggested the AI market selloff may have been an overreaction.
The market shock came as investors reassessed their AI-related bets after DeepSeek claimed its model was developed at a fraction of the cost of its competitors.
Experts noted that the development raised concerns about America’s AI dominance and the massive investments US companies have committed to the sector.
US President Donald Trump called the moment “a wake-up call” for the American tech industry but also suggested it could ultimately be “a positive” for the US.
“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.
He added that he was not worried about the breakthrough and asserted that the US would remain a dominant force in AI development.
Optimism surrounding AI investments has driven much of the US stock market’s growth over the past two years, fueling concerns about a potential bubble.
DeepSeek has quickly become the most downloaded free app in the US just a week after its launch.
Its emergence comes amid ongoing US efforts to curb China’s access to advanced chip technology, which is essential for AI development.
With restricted access to imported high-end chips, Chinese AI developers have collaborated and explored alternative approaches to artificial intelligence.
These efforts have led to AI models that require significantly less computing power, drastically reducing costs and potentially disrupting the industry.
Nvidia, the leading producer of the high-performance chips that underpin many AI investments, suffered the most significant blow on Monday.
The company’s stock plummeted by approximately 17%, erasing nearly $600 billion (£482 billion) from its market valuation.
Janet Mui, head of market analysis at RBC Brewin Dolphin, explained that investors often react to uncertainty by selling when confronted with groundbreaking developments.
However, Mui predicted that companies like Apple could ultimately benefit if AI models become more affordable. Lower costs could also boost other tech giants, which have faced scrutiny over their heavy AI-related expenditures.
Following Monday’s market turmoil, key US stock indexes remained steady. In New York, the Dow Jones Industrial Average closed 0.3% higher, the S&P 500 gained nearly 1%, and the Nasdaq, dominated by tech stocks, rose by 2%.
The UK’s FTSE 100 index of leading publicly traded companies also stabilized, closing 0.35% higher on Tuesday.
Earlier, shares in Japanese AI-related firms such as Advantest, SoftBank, and Tokyo Electron saw sharp declines, contributing to a 1.4% drop in the Nikkei 225 benchmark index.
Several Asian markets were closed for the Lunar New Year holiday, with mainland China’s financial markets set to reopen on February 5.
Deepseek AIWho founded DeepSeek?
DeepSeek was founded in 2023 by Liang Wenfeng in Hangzhou, a city in southeastern China.
The 40-year-old, an information and electronic engineering graduate, also founded the hedge fund that backed DeepSeek.
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 reaction to a previous version of his AI model.
“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.”
Following the launch of DeepSeek-R1 earlier this month, the company claimed its performance was “on par with” one of OpenAI’s latest models for tasks such as mathematics, coding, and natural language processing.
The technology has earned praise from industry leaders, including OpenAI CEO Sam Altman, who called it “an impressive model, particularly around what they’re able to deliver for the price.” However, he added that OpenAI would “obviously deliver much better models” in the future.
“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 specializing in China’s high-tech industries.
Ion Stoica, co-founder and executive chairman of AI software company Databricks, told the BBC that DeepSeek’s lower costs could accelerate AI adoption among businesses.
“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 more rapidly.”
DeepSeek claims its model can be trained on just 2,000 specialized chips, compared to an estimated 16,000 required for leading AI models.
However, not everyone is convinced by the company’s claims. Some have expressed skepticism, including tech mogul Elon Musk.
Musk responded to a social media post suggesting that DeepSeek actually has access to around 50,000 Nvidia chips—now banned from export to China—by simply commenting: “Obviously.” The app’s sudden rise in popularity has also sparked cybersecurity concerns.
In Australia, Science Minister Ed Husic was among those urging caution, telling national broadcaster ABC: “There are a lot of questions that will need to be answered in time regarding quality, consumer preferences, data security, and privacy management.”