LONDON/SINGAPORE – On Tuesday, technology stocks found stability, buoyed by a slight rebound in Nvidia following a historic decline in its market value. This drop stemmed from concerns over a low-cost Chinese artificial intelligence model that poses a potential threat to U.S. competitors.
Nvidia, a frontrunner in the AI chip industry, experienced a staggering 17% decline on Monday, erasing $593 billion from its market capitalization – marking the largest single-day loss for any company. This decline contributed to a downturn for U.S. equities.
By Tuesday, Nvidia shares experienced a recovery, rising about 5% in premarket transactions, while Oracle’s stock climbed by 3.4% and Marvell Technology saw a 3.6% increase. Additionally, European tech stocks managed to reduce some of their earlier losses.
The sell-off on Monday was triggered by the launch of a free AI assistant by China’s DeepSeek last week, which the startup claimed operates with significantly less data at a fraction of the current service costs. This development caught global attention, although skepticism persists regarding the veracity of DeepSeek’s cost assertions.
OpenAI CEO Sam Altman praised it as an impressive model, whereas U.S. President Donald Trump labeled it a wakeup call for our industries.
Altman, who leads the AI company behind ChatGPT, expressed in a social media post, We will certainly provide better models; it’s genuinely invigorating to face new competition!
DeepSeek’s sudden emergence in the AI sector has challenged the prevailing belief that China lags behind its U.S. counterparts by years.
The sell-off impacted tech stocks worldwide, resonating from Tokyo to Amsterdam and through Silicon Valley.
Marc Halperin, co-head of European equities at Edmond de Rothschild in Paris, commented that it might take several days to assess whether this week’s tech downturn is merely a temporary event or a significant shift in market sentiment and positioning.
He cautioned, If we witness a market correction, it could happen rapidly and have serious implications. This could pose risks for retail investors, particularly since substantial capital has flowed into stocks like Nvidia.
Data analytics firm Vanda Research reported on Tuesday that retail investors capitalized on Nvidia’s decline, acquiring a record net investment of $562.2 million in the company on Monday.
In Europe on Tuesday, shares of Dutch semiconductor company ASML, which had fallen 7.1% on Monday, inched up by 0.8%. Infineon’s shares increased by 0.4%, and German software giant SAP rose by 0.2% following its quarterly results.
In the U.S., Broadcom dropped 17.4% on Monday, while Microsoft, a supporter of ChatGPT, fell by 2.1%, and Alphabet, the parent company of Google, saw a decline of 4.2%. The Philadelphia semiconductor index plummeted by 9.2%, marking its steepest percentage decrease since March 2020.
NO MARGIN OF ERROR
The recent sell-off serves as a stark reminder of the concentration of investor capital in a limited number of stocks, which trade at a significant premium compared to the broader market.
Before Monday’s drop, Nvidia shares were trading at nearly 60 times their earnings, while the entire S&P 500 traded at 22 times, according to LSEG data.
David Bahnsen, chief investment officer at The Bahnsen Group, noted, The alarming aspect of Monday’s tech sell-off is that many AI and tech firms have valuations that allow for no margin of error.
He added, The overrepresentation of tech stocks in numerous investor portfolios and their high concentration in market indices has become a notable yet under-recognized risk.
The excitement surrounding AI has led to a massive influx of capital into equities, driving up valuations and pushing stock markets to historic highs. This phenomenon has contributed to an increase of around $10 trillion in the combined market value of the Magnificent Seven companies since the AI boom was ignited by ChatGPT in November 2022.
ENTER THE ROBOTS
Investors have also heavily borrowed to acquire these high-priced tech stocks. The sell-off on Monday likely necessitated the liquidation of other assets to cover losses, a situation exacerbated by the prevalence of algorithmic trading models in the current market, according to Rob Almeida, global investment strategist and portfolio manager at MFS International.
He remarked, During days like this, behind the scenes, leverage might be unwinding in ways that are not immediately visible.
Almeida continued, When you factor in overperformance by companies, a possibly oversaturated AI supply chain, extremely elevated valuations, significant leverage within the system, and a surge of algorithmic trading, it all becomes clear in retrospect.
Several major tech firms, including Apple and Microsoft, are set to release their earnings this week, and their executives will be eager to mitigate concerns regarding capital expenditures.
