Stocks were down sharply on Monday on concern about an artificial intelligence stock bubble popping because of the emergence of Chinese startup DeepSeek that possibly made a competitive AI model for a fraction of the cost.
The Dow Jones Industrial Average dropped 200 points, or 0.4%. The Nasdaq Composite shed 3.4%, and the S&P 500 slid 1.9%.
Last week, DeepSeek released an open source AI model that reportedly outperformed OpenAI’s in several tests. The company had launched an open source large-language model in December for what it says was less than $6 million. While Wall Street questions that figure, the foreign startup is still raising concern that the billions being spent to build out big AI models could be done for much more cheaply.
“Why are investors concerned? The news over the past few months has been about the huge capex announcements of Microsoft, which is spending $80bn in ’25, while Meta recently announced investments between $6bn and $65bn,” wrote JPMorgan analyst Sandeep Deshpande. “Thus, with these considerable sums flowing into AI investments in the US, that Deepseek’s highly efficient and lower resource-intensive AI model has shown such significant innovation and success is posing thoughts to investors that the AI investment cycle may be over-hyped and a more efficient future is possible.”
AI darling Nvidia dropped 12% in the morning trading.
Monday’s sharp declines come as traders brace for a major week, with “Magnificent Seven” members Meta, Microsoft, Tesla and Apple all due to report their latest quarterly results.
On top of that, the Federal Reserve will hold its first policy meeting of the year, deciding on the level of interest rates on Wednesday. Fed funds futures are pricing in a more than 99% chance that the central bank leaves interest rates unchanged, according to CMEGroup’s FedWatch Tool.
All three major U.S. indexes recorded their second-straight positive week last week, reassuring investors that the bull market remains intact even after December’s dip. The S&P 500 hit a new intraday record on Friday after notching a fresh all-time closing high in the previous session.
