US tech stocks lost over $1 trillion (£802bn) this week following the launch of China’s low-cost AI chatbot, DeepSeek.
Nvidia, a key AI chip supplier, fell 17 per cent ($589 billion) on Monday but has since rebounded nearly 9 per cent. The drop triggered investors to sell off US tech stock but experts say this may have been an overreaction, with markets now stabilising. Experts view DeepSeek’s impact as a short-term disruption rather than a fundamental shift, noting that lower AI costs could expand the market.
Investors are advised to stay diversified, avoid panic selling, and see market dips as potential opportunities.
Barnett Waddingham chief investment officer Matt Tickle says: “This week saw tech stocks tumble after ambitious claims from Chinese AI firm DeepSeek challenged the US’s ability to remain a frontrunner in AI. With the bulk of the ‘Magnificent 7’ now due to report earnings over the next two weeks, there are concerns this news could prompt knee-jerk reactions from investors as volatility continues over the short-term.
“In situations like these, investors should be reminded of the importance of diversification, both with across their portfolios and below the headlines. While the Mag7 are often considered tech stocks, their reach is much more diverse and spans several sectors of the market. So while Nvidia drew headlines on Monday as it fell nearly 17 per cent, three out of seven Mag7 stocks rose in value, while collectively the six ex-Nvidia stocks saw broadly flat performance. It’s expected that the AI megatrend will continue, but sizing of exposure to any particular trend is key to managing risk.
“For long-term pension investors, it’s important to avoid overreacting. Global markets are up 2.4 per cent year-to-date on the back of 20 per cent returns in 2024 and so pricing does need careful attention. However, a 1.4 per cent fall in a given day on the US, or any, stock market is entirely expected from time to time. We saw similar fears, albeit from a different source, on equity and tech valuations in August 2024 that proved short lived. Of course, don’t get complacent; if AI turns out to have no productivity impact and so proves to be a waste of $100bns of capex, then global equity valuations will suffer considerable falls. But that is not our view at present.
“If anything, market uncertainty should remind investors about the importance of taking profits if weightings have grown above strategic levels. All investment, whether retail or institutional, should be for the long-term.”
AXA IM portfolio manager Matt Ward says: “DeepSeek’s techniques help lower the cost of AI, a path of cost reduction that is in rapid progress already and crucial to AI adoption. This cost reduction is not a substitute for other improvements and hardware scaling, but rather, it complements them. The company’s gains, even when adopted by other model suppliers, do not negate the need for these other advancements. Instead, they all contribute to making AI economically viable and widely adopted.
“Reducing the operational costs associated with AI potentially increases the return on investment (ROI). We think that this cost reduction doesn’t limit the market, but rather, it allows for more resources to be allocated to other areas of growth, thereby expanding the market in the long run. We believe that the clearest beneficiaries are those downstream of the AI infrastructure and models, i.e. the software companies, the AI application developers and the broader innovation being made around AI.”
Evelyn Partners chief investment strategist Daniel Casali says: “The recent release of China’s DeepSeek Artificial Intelligence (AI) model has caused turmoil in the markets, stirring concerns among AI investors and raising uncertainty about chip demand. This new model, which appears to be cost-effective, could impact the broader AI landscape by making AI models more affordable and efficient. However, it has yet to be fully verified, leaving questions about its true capabilities and comparison with OpenAI’s ChatGPT models.
“In the short term, this has led to share price volatility, especially among companies most exposed to the AI theme. Nvidia fell -17 per cent, Broadcom is down -17.4 per cent, Cadence Design Systems is off -9.5 per cent, and Alphabet, Microsoft and Tesla shares slid -8.4 per cent, -4.2 per cent and -3.2 per cent respectively. We see this as more of a rotation within the market as per our ‘broadening out’ theme, than a risk-off move away from equities, with most stocks in the S&P 500 in positive territory.
“The US stock market remains strong, supported by robust US GDP which is growing at a solid pace. With strong earnings growth from top US companies and continued demand for micro-chips, the AI sector remains a key point of focus amidst the broader economic landscape and shifting geopolitical dynamics. The ongoing US-China tech rivalry is also a factor, as China seeks to challenge US leadership in AI development.”
Hargreaves Lansdown head of money and markets Susannah Streeter says: “There’s been an easing of tech troubles stateside with a tentative recovery for beleaguered chip stocks. It was a shaky start to trading for Nvidia and Taiwan Semiconductor Manufacturing Company as concerns continued to ricochet about the prospects for earnings ahead, given the shock progress made by the Chinese AI upstart DeepSeek.
“But both companies have gained back some ground and are firmly in the green. Given Monday’s steep falls, there’s a long way to go for Nvidia’s crown to shine brightly again but the rash of selling looks overdone. Steep reductions in development costs during nascent tech shifts have been commonplace in economic history and such reductions can lead to a larger addressable market. Future demand for computing power could outstrip current expectations, prospects which are likely to have encouraged investors to buy the dip.
“The current weakness could favour those willing to tolerate the added volatility and take the chance of a turbulent ride for longer-term gain. Nevertheless, when it comes to widespread adoption globally, it’s not going to be an open goal and the biggest players will still have to keep on their toes to stay dominant.”