Tech stocks fall as Chinese rival disrupts AI; Nvidia plunges 16%

The S&P 500 was down 1.7% in afternoon trading, heading for its worst day in over a month. Big Tech stocks took some of the heaviest losses, with Nvidia down 16%, and they dragged the Nasdaq composite down 3.2%.

Stocks outside of AI-related industries held up much better, though. As of 12.42 pm Eastern time, the Dow Jones Industrial Average was up 137 points, or 0.3%. The Dow has much less of an emphasis on tech than the S&P 500 and Nasdaq.

The shock to financial markets came from China, where a company called DeepSeek said it had developed a large language model that could compete with US giants but at a fraction of the cost. DeepSeek had already hit the top of the chart for free apps on Apple’s App Store by Monday morning, and analysts said such a feat would be particularly impressive given how the US government has restricted Chinese access to top AI chips.

Scepticism, though, remains about how much DeepSeek’s announcement will ultimately shake the AI supply chain, from the chip makers making semiconductors to the utilities hoping to electrify vast data centres gobbling up computing power.

It’s a sharp turnaround for the AI winners, which had soared in recent years on hopes that all the investment pouring in would remake the global economy and deliver gargantuan profits along the way. Such stellar performances also raised criticism that their stock prices had gone too far, too fast.

Before Monday’s drop, Nvidia’s stock had soared from less than $20 to more than $140 in less than two years, for example.

Other Big Tech companies had also joined in the frenzy, and their stock prices had benefited too. It was just on Friday that Meta Platforms CEO Mark Zuckerberg was saying he expects his company to invest up to $65 billion this year and grow its AI teams significantly while talking up a data centre in Louisiana that will be so large it would cover a significant part of Manhattan.

A small group of such companies has become so dominant that they’ve come to be known as the “Magnificent Seven.” These companies — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — alone accounted for more than half the S&P 500’s total return last year, according to S&P Dow Jones Indices.

Their immense sizes in turn have also given them huge sway over the S&P 500 and other indexes that give more weight to bigger companies. It shows the risk of betting too much on just a few winning stocks, something that market experts call “concentration risk.”

That “can feel good when those few names or ideas are on the ascent, but it is even more dangerous when disruptions take place,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Still, he suggested not overreacting to Monday’s sharp swings. “It is possible that the news out of China could be overstated and then we could see a reversal of the recent market moves,” Jacobsen said. “It is also possible that the news is true, but then that would present new investment opportunities.”

More big swings may be ahead. Apple, Meta Platforms, Microsoft and Tesla are all on the schedule this upcoming week to report how much profit they made at the end of 2024.

The pressure is on companies to keep delivering strong profits, particularly after a recent jump in Treasury yields, even with Monday’s decline. When bonds are paying more in interest, they put downward pressure on stock prices.

So far, big US companies have been reporting better results than analysts expected. AT&T became the latest on Monday, and its stock rose 6%.

In stock markets abroad, movements for broad indexes across Europe and Asia weren’t as forceful as for the big US tech stocks. France’s CAC 40 fell 0.3%, and Germany’s DAX lost 0.5%.

More big swings may be ahead. Apple, Meta Platforms, Microsoft and Tesla are all on the schedule this upcoming week to report how much profit they made at the end of 2024.

The pressure is on companies to keep delivering strong profits, particularly after a recent jump in Treasury yields, even with Monday’s decline. When bonds are paying more in interest, they put downward pressure on stock prices.

So far, big US companies have been reporting better results than analysts expected. AT&T became the latest on Monday, and its stock rose 6%.

In stock markets abroad, movements for broad indexes across Europe and Asia weren’t as forceful as for the big US tech stocks. France’s CAC 40 fell 0.3%, and Germany’s DAX lost 0.5%.

AP