Nasdaq 100: Are AI Stocks the New Dot-Com Bubble After DeepSeek’s Breakthrough?

DeepSeek AI Model Sparks Tech Selloff: Is U.S. Dominance at Risk?

Chinese startup DeepSeek has sent shockwaves through global markets with the launch of its cost-efficient AI model, hailed as AI’s “Sputnik moment” by venture capitalist Marc Andreessen. The announcement led to a massive selloff in AI-linked stocks as investors questioned whether U.S. companies can sustain their dominance in artificial intelligence.

The Nasdaq Composite fell 3.1%, while the S&P 500 dropped 1.8%. Nvidia led the losses with a 13% decline, its worst since March 2020. Major tech players like Microsoft (-3.8%), Alphabet (-3.3%), and Meta Platforms (-3.1%) followed suit. The selloff wasn’t confined to the U.S.—European stocks like ASML fell 7.5%, while Japan’s SoftBank dropped over 8%.

Could Cheaper AI Models Redefine the Sector?

DeepSeek’s AI model, developed for under $6 million, starkly contrasts with the $100 million-plus budgets of U.S. tech firms. Leveraging Nvidia’s H800 chips—a lower-cost alternative developed to meet U.S. export controls—DeepSeek claims its model rivals the performance of cutting-edge systems. If true, this cost breakthrough could fundamentally alter how AI innovation is financed.

However, skeptics, including analysts at Bernstein, caution that DeepSeek’s figures might not include previous research and development costs. Even so, the possibility of achieving similar results with reduced spending raises questions about whether U.S. companies have been over-investing in their AI initiatives.

Are Valuations in the AI Sector Overstretched?

The sharp decline in AI-linked stocks highlights concerns over valuations in the tech sector. Nvidia’s stock, which has surged over 200% in 18 months, trades at 56 times its earnings, far exceeding the Nasdaq’s 16x average multiple. This has led some investors to worry that optimism around AI is being fueled more by FOMO than by measurable returns.

Similar to the dot-com bubble, the influx of speculative capital into AI companies has inflated stock prices. Traders are now questioning whether U.S. firms can justify their high spending on AI infrastructure, especially with more cost-efficient competitors like DeepSeek entering the fray.

What Lies Ahead for AI Stocks?

In the short term, AI-linked stocks are likely to face continued selling pressure as markets digest the implications of DeepSeek’s model. However, U.S. companies still maintain a technological edge, thanks to access to advanced GPUs and established infrastructure. Traders should prepare for increased volatility, as firms may need to pivot toward more efficient models to maintain their competitive positions.

For now, the bearish outlook for AI stocks persists, but any significant innovations or strategic shifts from leading players could offer opportunities for recovery.

More Information in our Economic Calendar.