Investing.com – The S&P 500 closed lower Monday as fears that low-cost Chinese AI startup DeepSeek poses a big threat to U.S. AI dominance triggered a sea of red in tech.
At 4:00 p.m. ET (21:00 GMT), the S&P 500 index fell 1.5%, the Dow Jones Industrial Average gained 289 points, or 0.7%, and the NASDAQ Composite slumped 3.1%. CBOE Volatility Index soared more than 20% to around 18.
China’s DeepSeek pressures tech sector, power companies
China's AI startup DeepSeek has unveiled its latest model, R1, which is claimed to demonstrate performance comparable to leading US models like OpenAI’s ChatGPT but at a significantly reduced cost.
This advancement poses a competitive threat to established players in the AI hardware space, notably Nvidia (NASDAQ:NVDA), which has seen its stock decline around 17%.
Other AI-related stock have also been hard, with the likes of Broadcom (NASDAQ:AVGO), Advanced Micro Devices (NASDAQ:AMD), Microsoft (NASDAQ:MSFT) and Palantir (NASDAQ:PLTR) all sharply lower. Power companies including Vistra Energy Corp (NYSE:VST) and Constellation Energy Corp (NASDAQ:CEG), which have gained on the back of bets for increased energy-related AI demand, fell sharply.
“The entire US equity market is resting on the backs of mega-cap tech stocks, which in turn are being propelled by AI optimism – while DeepSeek’s claims have attracted a fair amount of skepticism, the company could represent a fatal thread being pulled from the edifice of AI enthusiasm,” analysts at Vital Knowledge said in a note to clients.
Wedbush, however, pushed back describing the sell off as buying opportunity as the competitive threat posed by DeepSeek to U.S.-AI stalwarts including Nvidia, Microsoft, Alphabet (NASDAQ:GOOGL), and others is minimal.
"DeepSeek impressed the tech community with this LLM model...but this is not launching 100x the capacity/ algorithms that is needed to even consider this a competitive threat in our view," Wedbush added.
Tariffs threat remains live
Confidence had also been hit by President Donald Trump's threat of tariffs on Colombia after the Latin American country refused to allow two US repatriation flights carrying deported individuals to land, a directive attributed to Colombia's President Gustavo Petro.
While Colombia quickly relented, this incident has reminded investors that the threat the Trump administration will levy economic sanctions on economic rivals remains live.
Trump had earlier announced that tariffs on Mexico, Canada, China, and the European Union could be announced on Feb. 1.
Earnings ramp up
On the corporate front, attention this week will likely center on quarterly results from a host of influential tech companies this week.
Instagram-owner Meta Platforms (NASDAQ:META), iPhone-maker Apple (NASDAQ:AAPL), software titan Microsoft (NASDAQ:MSFT) and Elon Musk-led electric carmaker Tesla (NASDAQ:TSLA) are all due to report.
Of the 16% of S&P 500 companies having reported fourth-quarter results, 80% have posted a positive earnings per share surprise and 62% have reported a positive revenue surprise, according to FactSet data published Friday.
Elsewhere, AT&T (NYSE:T) stock rose 6% after the telecom giant’s fourth-quarter wireless subscriber growth surpassed expectations, fueled by strong demand for its discounted premium plans combining 5G mobile with high-speed fiber data services.
Fed meeting, inflation data in spotlight
Also of interest will the Federal Reserve's upcoming policy meeting due later in the week.
The Fed is widely tipped to keep borrowing costs unchanged, following a string of reductions late last year that left the all-important benchmark rate at a range of 4.25% to 4.50%.
But investors will be keen for officials to give any sense of when they might resume cutting rates, given price growth remains above the Fed’s 2% target.
Fed’s preferred gauge of inflation - PCE price index data, and advance GDP estimates for the fourth quarter are also due this week.