Is DeepSeek About To Pop Wall Street's AI Bubble?

It was all going so well for Wall Street's artificial intelligence market dominance. The arrival of DeepSeek, a competitively priced Chinese AI model, has served as a timely reminder that nothing's ever simple in the world of tech stocks. Is the S&P 500's AI bubble about to burst? 

The sucker punch from DeepSeek stems from the complacency of US markets in the post-pandemic landscape. Since the collapse of Evergrande, Wall Street has been largely unperturbed by China's innovation pipelines. 

When Evergrande first defaulted on its debt on December 10, 2021, the S&P 500 was at 4,712 points. Since then, the index has rallied almost 27%, briefly breaking the 6,000 barrier off the back of a sweeping AI boom period triggered by the launch of ChatGPT. 

While weakness in the Chinese economy wasn't a decisive factor in Wall Street's recent outperformance, it did provide investors with the confidence that the United States was leading the race for AI dominance with few international contesters. 

With the US market still controlling 68% of the global venture capital funding in artificial intelligence companies, and Silicon Valley accounting for around half of that figure, it's clear that there's reason behind investor confidence in domestic AI leaders, but DeepSeek has served as an inconvenient reminder that other nations are working on their own cutting-edge models. 

The shockwaves sent by China's unveiling of DeepSeek sparked widespread investor sell-offs on Wall Street. At its lowest point, Nvidia (NVDA) tumbled 15.65% on its year opening price before mounting a recovery, while the S&P 500 has also struggled to recapture the momentum it built over the past two years of AI-powered market rallies. 

Sell-offs in the wake of DeepSeek's announcement also saw non-technology companies face a downturn. As markets reacted to the news on January 27, energy companies like Constellation Energy (CEG), the company behind the prospective revival of the Three Mile Island nuclear plant for powering AI data centers, fell 21%. Other energy competitors like Vistra (VST) and GE Vernova (GEV) dropped 28% and 21% respectively, before mounting small recoveries. 

Additionally, futures for the natural gas that is used to power electricity generators slipped 5.9% while oil dipped 2%. 

The cryptocurrency landscape was also left reeling, with the likes of Bitcoin and other altcoins floundering in the weeks that followed DeepSeek's announcement due to a number of different factors. 

Could the arrival of DeepSeek have exposed Wall Street's market bubble? And could US AI stocks be in for a testing time? The future appears clouded as the United States' dominance in artificial intelligence is challenged for the first time. 

Is DeepSeek a Threat? 

The launch of DeepSeek comes at a time when the Chinese economy is undergoing a significant government-backed stimulus operation to drive growth following years of decline. 

As a result, China's AI industry has been massively subsidized, and more than $1.4 trillion has been pledged to AI advancement by 2030. 

Additionally, China has acquired intellectual property from the US via DFI in foreign tech firms, VC investments, establishing JVs between domestic and foreign companies, requiring licensing agreements for foreign firms to operate in China, attracting US experts to work on domestic AI development, and has reportedly spied on established firms to further their artificial intelligence development. 

Worryingly for Wall Street, DeepSeek appears to be marketed as a low-cost alternative to established generative AI models like OpenAI's ChatGPT. But could China really be coming for the United States' AI market dominance? 

According to a recent report by Reuters, more Chinese firms accommodating DeepSeek's cost-effective AI models are increasing their orders for Nvidia's H20 AI chips to accommodate the technology. 

The report cites six sources and suggests that the adverse impact of China's AI adoption surge may have been overblown, and could even aid the adoption of United States technologies overseas. 

Despite this, stocks like Alphabet (GOOG) and Meta (META) have also faced sell-offs due to fears over the impact of DeepSeek, but other industry experts are skeptical about the quality of the technology utilized by the AI platform. 

Ray Wang, chief executive of Constellation Research, dismissed China's DeepSeek announcement at the time as ‘psychological operations warfare', and suggested that the professed efficiency of DeepSeek should be taken with a pinch of salt. 

Even though experts are unsure, DeepSeek blitzed the app download charts with 16 million downloads in its first 18 days, far exceeding the 9 million downloads recorded by OpenAI's ChatGPT model in the same timeframe. 

Will Wall Street Have the Last Laugh?

Despite the shock of DeepSeek, market analysts still believe that Wall Street is well-positioned to brush off the threat from China's AI industry.  

"With Donald Trump's return to the presidency, financial markets are poised for potential upside driven by expectations of tax and Fed rate cuts, deregulation, and a focus on corporate profitability," highlighted Maxim Manturov, head of investment research at Freedom24. 

"The Trump administration is likely to prioritize policies favoring large corporations, especially in sectors such as technology, banking, and energy. This could lead to optimism in the stock market as investors expect higher earnings due to lower corporate tax rates and reduced regulatory burdens."

Indeed, the Trump administration appears to be placing a strong emphasis on supporting AI growth, and Donald Trump recently announced the Stargate venture, an AI initiative backed by OpenAI, SoftBank, and Oracle (ORCL) which would immediately invest $100 billion in domestic artificial intelligence infrastructure like data centers, while also spending an additional $400 billion over the next four years. 

Meta has also committed to growing its capital expenditures to as much as $65 billion in 2025, highlighting that the United States is keen to maintain its strong footing in the race for AI dominance. 

Avoiding Panic

The arrival of DeepSeek shouldn't be a cause for panic among investors in US artificial intelligence stocks, and the arrival of a Chinese competitor could help tech leaders become more efficient in the rollout of their AI innovations. 

Although Wall Street is more jittery as uncertainty surrounding DeepSeek lingers, early evidence suggests that AI leaders like Nvidia could actually improve sales as more international businesses seek to utilize the technology. Other competitors may also be inspired to pursue low-cost competitors to their new rivals, helping to foster more market growth. 

DeepSeek's arrival has been a shock for Wall Street, but it may yet inspire US tech leaders to level up their AI dominance and out-innovate their new competitor.

On the date of publication, Dmytro Spilka did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer. Dmytro Spilka does not intend to make a trade in any of the securities mentioned above in the next 72 hours.