Nasdaq tanks, S&P 500 drops, AI worries rock tech stocks

Nasdaq on Monday expressed growing skepticism about U.S. artificial intelligence dominance, after Chinese artificial intelligence startup DeepSeek attracted significant attention over the weekend. .

The high-tech Nasdaq Composite (^i tike) sank more than 3.5%, while the S&P 500 (^gspc) slid more than 2%. The Dow Jones Industrial Average (^DJI) fell 0.5%, or more than 200 points.

DeepSeek's recent launches are more efficient and require fewer chips than Open AI or Meta's AI models, raising questions about the U.S.'s place in AI. It also prompted a reconsideration of valuations, including that of chip leader Nvidia (NVDA), which saw its stock drop 13%.

Other chip-related stocks fell. Semiconductor equipment maker ASML (ASML) lost more than 8%, while ARM (ARM), Broadcom (AVGO) and Micron Technology (MU) were also hammered.

Wall Street analysts disagreed with the market reaction.

“I don't think DeepSeek is the end of the world for AI infrastructure,” Stacy Rasgon, managing director and senior analyst at Bernstein, told Yahoo Finance.

“The models they built are fantastic – they really are – and they all pulled out a lot of levers in terms of efficiency. But what they did was also not miraculous, and it wasn't unknown to other top AI researchers or other AI labs 's,” he added.

Ahead of Sunday night's Future Rout, investor attention was entirely focused on what it might mean for the future of China's U.S.-centric AI investment boom, which comes after President Trump reminded investors over the past weekend that tariffs remain on his agenda.

Despite the back-and-forth seen between the White House and Colombia, the South American country finally accepted a deal to keep migrants deported from the U.S. to avoid an immediate 25% tariff on U.S. exports, the speed at which the president's action is Key takeaways for investors.

“Tariffs are coming,” Capital Economics Group chief economist Neil Shearing wrote in a note on Monday.

“This appears to be one of the key takeaways from an extraordinary week, which began with the new president's inaugural address skipping over the topic of tariffs, but was followed by a series of threats from Donald Trump that began to threaten the leadership of trading partners (and leading trading partners) are filing charges – and reports indicate tariffs may be imposed on Mexico and Canada this weekend.

“All of this has poured some cold water on the idea, and the threat of tariffs that are still lurking in some parts of the market is alarming. Now, it seems like higher tariffs are in the pipeline, and as we've already embedded our That way they can be applied relatively quickly.”

As Shear noted, Trump's first week in office was met with relief from investors as he declined to impose new duties on any major trading partners in an executive action on Monday.

The president later set a February 1 deadline for firmer action.

How tariffs are tied to the fate of TikTok, for example, should serve as a reminder that while the economic impact of tariffs is of interest to investors – particularly the impact on inflation and interest rates, which could be due to higher tariffs The implications – their tariffs and interest rates – they symbolize are more important.

That said, for investors trying to understand Trump's mindset at any given point in time to get a firm answer, tariffs are the best way to go.

One of the biggest discussions among investors over the past two years has been about concentration in the S&P 500.

That means the largest 10 companies account for a record percentage of the overall index value, as we saw in this chart from Truist Wealth's Keith Lerner published earlier this month.

Of course, there is nothing inherently bad about market concentration.

The most important long-term driver of stock prices is earnings growth, and the market's largest companies (most notably seven, most notably – have been the largest contributors to earnings growth since the AI ​​boom began in early 2023, and are expected to continue Keep it like this for a year.

In fact, Wall Street expects Mag 7 revenue growth to grow Refuel in the second half of this year.

What trades in the market is not what happens today, but what investors think will happen tomorrow. Not just the rate of change, but the expected rate of change.

So a fearful characterization of DeepSeek's capabilities seems most fair when those expectations are discouraged or even questioned, and we get the reaction we saw this morning.

Many companies and industries will see unexpected threats to their competitive position emerge over time.

Investors will continually reassess their embedded assumptions about earnings growth and then assess the ultimate value of a given company's future cash flows, when discounted back to the present.

As it happens, that process worked out Monday morning for the market's largest companies, which have never played a greater role in shaping the direction of the entire stock market. So some tough questions ended up taking a trillion dollars out of the stock market's value.

NVIDIA (NVDA) loses 10% of pre-market sales amid concerns about Chinese OpenAI rival DeepSeek. Worry? DeepSeek reportedly developed its powerful new large language model using fewer advanced chips than those used by U.S. rivals.

I'll have more to say about this in this morning's opening podcast episode on Yahoo Finance. But the reaction certainly seems overdone.

The notion that Meta is suddenly going to reverse the billions it has spent on AI infrastructure, powered by NVIDIA chips, seems far-fetched. Furthermore, can one even believe DeepSeek's claims? In the end, DeepSeek's alleged advances are unlikely to change Nvidia's demand backdrop this year – if at all.

It's nice to really question this type of journalism.