[New York Stock Market Briefing] Nasdaq Plummets 3% Amid Chinese AI 'DeepSeek' Counterattack... US Market 'Fear'

The US stock market was gripped by fear due to the counterattack of Chinese AI startup DeepSeek.

News that DeepSeek's service achieved performance comparable to OpenAI's ChatGPT at a much lower cost led to aggressive sell-offs targeting AI-related stocks. NVIDIA, the market cap leader, saw its market cap evaporate by about $600 billion (approximately 862 trillion won) in just one day.

However, as the sell-off continued mainly in tech stocks, the appeal of safe assets in traditional industries and value stocks was highlighted, leading to a rise in the blue-chip index.

On the 27th (Eastern US time), the Dow Jones Industrial Average closed at 44,713.58, up 289.33 points (0.65%) from the previous session at the New York Stock Exchange (NYSE).

The Standard & Poor's 500 Index fell 88.96 points (1.46%) to 6,012.28, and the Nasdaq Composite Index plunged 612.47 points (3.07%) to close at 19,341.83.

There had been an 'American exceptionalism' surrounding the AI industry in the New York stock market. The logic was that only companies in the US could implement AI at the current level, so an AI premium should be added to the stock price.

The emergence of DeepSeek was an event that reminded us that such a premium was an illusion.

Western media, including the US and UK, reported intensively last week that DeepSeek showed extreme efficiency, using a much smaller scale and cost of graphics processing units (GPUs) for training large language models (LLMs) compared to US big tech companies.

This raised suspicions that major tech companies, including Microsoft, might have made unnecessary waste in AI investments.

The New York Times reported last week that the cost DeepSeek invested in developing DeepSeek-V3 was only $5.576 million (about 7.88 billion won).

This is one-tenth of the cost Meta spent training its latest AI model, Llama 3, with 'H100'. H800 is a product released by NVIDIA with lowered specifications of H100 due to US high-performance semiconductor export regulations.

In short, DeepSeek achieved performance comparable to ChatGPT with low performance and low budget.

Goldman Sachs said, "So far, the market has given huge rewards (premiums) to companies investing in AI, such as Google, OpenAI, and Microsoft, and companies providing AI-related tools or infrastructure," adding, "As the DeepSeek model raises doubts about the spending of existing AI companies, this scenario is more broadly shaking investors' confidence."

As market confidence shook, AI-related stocks fluctuated.

The Philadelphia Semiconductor Index, composed of major AI and semiconductor-related stocks, plummeted 9.15% on this day. It is the largest drop since a 7.75% plunge on September 3 last year.

The last time the Philadelphia Index plunged more than 9% was on March 18, 2020. This means the shock is as strong as during the height of the COVID-19 crisis.

NVIDIA, the flagship of the AI industry, saw its stock price plummet 17% on this day. Its market cap plummeted by $590 billion in one day, dropping to the third place in market cap at once. The market cap decrease in one day is the largest in US stock market history.

Another AI industry beneficiary, Broadcom, also plummeted 17.40%, dropping its market cap below $1 trillion. Marvell Technology plunged -19.10%, and Micron Technology plunged -11.71%. Oracle also fell 14%.

In terms of American Depositary Receipts (ADR), TSMC fell -13.33%, ASML -5.75%, and Arm -10.19% on the New York Stock Exchange.

However, not all tech stocks were swept away by the sell-off. Apple, which was relatively lagging in the AI industry, was highlighted for having less exposure (risk exposure), rising 3.18% instead.

Meta also rose 1.91%, and Amazon held up with a strong performance. Microsoft recorded a decline of 2%, and Alphabet recorded a decline of 4%, showing a relatively favorable trend. Tesla's decline was limited to 2.32%.

Nancy Tengler, CEO of Tengler Investments, said, "Apple has the edge AI (on-device AI) leadership, which is the most important hardware in our lives," adding, "It has the potential to be the ultimate winner."

Sam Stovall, chief investment strategist at CFRA Research, said, "Selling first and asking questions later is a good example, as investors feel that the evaluation of technology in general, especially semiconductors, is somewhat excessive," adding, "It's encouraging that investors are turning to defensive areas such as consumer goods or real estate rather than necessarily selling stocks."

As the preference for safety increased, buying pressure was concentrated on blue-chip stocks that make up the Dow Jones.

Walmart and Costco showed a rise of 2%, and essential consumer goods like Johnson & Johnson and Procter & Gamble recorded a rise of 3-4%.

By sector, technology plummeted 5.58%.

Utilities also plunged 2.33%.

Instead, essential consumer goods rose 2.85%, and healthcare rose 2.19%.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of a 25bp cut in the benchmark interest rate by March in the federal funds rate futures market rose to 31.1%.

It rose by about 4 percentage points compared to the closing time the previous day.

The CBOE Volatility Index (VIX) jumped 3.05 points (20.54%) to 17.90 from the previous session.

Soojin Choi, Hankyung.com reporter naive@hankyung.com