US stocks dropped sharply on Monday, with chipmaker Nvidia losing nearly $600 billion in market value, following a major breakthrough by a Chinese AI startup, DeepSeek. This unexpected development has sparked concerns over the dominance of American tech giants in the artificial intelligence space.

DeepSeek’s Revolutionary AI Model

DeepSeek, a year-old Chinese startup, revealed an AI model called R1, comparable to ChatGPT, but at a fraction of the cost. The company claimed it spent just $5.6 million on computing power to build its model, a stark contrast to the billions invested by US tech giants like OpenAI, Google, and Meta.

This revelation has shaken investor confidence in the American tech sector, raising questions about the efficiency and profitability of high-cost AI investments by US companies.

Stock Market Fallout

The tech sector bore the brunt of the shock, leading to significant losses across US stock indices:

• The Nasdaq plunged 3.1%.
• The S&P 500 fell by 1.5%.
• However, the Dow rose 0.7%, buoyed by gains in healthcare and consumer stocks.

Nvidia, the leading supplier of AI chips, experienced the largest single-day loss in market value ever recorded, plummeting nearly 17% and losing $588.8 billion. This drop pushed Nvidia from its position as the most valuable publicly traded company to third place, trailing behind Apple and Microsoft.

Other tech companies, including Meta, Alphabet, and Nvidia competitors like Marvell and Broadcom, also suffered sharp declines, amplifying the broader market selloff.

A Blow to US AI Dominance

The achievement by DeepSeek is particularly striking given the US government’s restrictions on exporting high-powered AI chips to China, citing national security concerns. DeepSeek’s ability to deliver an advanced AI model using underpowered chips has raised questions about the competitive edge of US companies in AI development.

According to analysts like Keith Lerner of Truist, the US’s dominance in AI has driven its market outperformance. However, DeepSeek’s breakthrough is now forcing investors to reevaluate the massive spending by US companies and whether it translates into sustainable profits.

Ripple Effects Across Industries

The news prompted a significant shift in investment trends:

• Energy companies: Firms reliant on powering AI data centers, like Constellation Energy and Vistra, saw steep declines of 21% and 28%, respectively.
• Cryptocurrencies: Bitcoin and other digital currencies also experienced notable drops.
• Natural Gas and Oil: Futures fell by 5.9% and over 2%, respectively, as energy demand expectations shifted.

Future Implications and Unanswered Questions

While DeepSeek’s breakthrough is undeniably impressive, the long-term implications remain unclear. Experts caution against overreacting to the news, as American companies have built significant advantages over years of investment.

“The race is on to determine which technology proves most effective and how Western players will adapt,” said Michael Block, a market strategist.

Moreover, skepticism persists regarding DeepSeek’s claims of achieving such cost efficiency. Without independent verification, the market’s reaction may be premature.

Despite the shake-up, analysts remain optimistic about US innovation. Giuseppe Sette, president of AI market research firm Reflexivity, highlighted the US’s strong foundation in talent and capital, making it a prime ground for groundbreaking AI developments.

This week’s upcoming earnings reports from major tech companies may further shape the market’s trajectory as the industry grapples with this unexpected challenge.