Tech Stocks Tumble Sparked by China’s DeepSeek

Summary

WSJ What’s News: Detailed Summary of "Tech Stocks Tumble Sparked by China’s DeepSeek"

Release Date: January 27, 2025
Host: Alex Osmaleh, The Wall Street Journal

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1. Introduction: Significant Market Downturn Triggered by AI Developments

In the January 27, 2025 episode of WSJ What’s News, host Alex Osaleh delves into a dramatic shift in the U.S. stock market, highlighting a monumental loss exceeding a trillion dollars primarily driven by a plunge in tech stocks. The catalyst? The unveiling of a cost-effective artificial intelligence model by the Chinese company DeepSeek.

Alex Osaleh [00:33]: "More than a trillion dollars have been erased from the US Stock market. Tech stocks dropped after China's Deep Seek released a cheaper AI model. Plus, is this the correction in AI stocks investors were expecting?"

2. The DeepSeek Revelation: A Game-Changer in AI Technology

DeepSeek's recent announcement has sent shockwaves through the tech sector. The company introduced an AI model developed at a fraction of the usual cost—approximately $5.5 million—contrasting sharply with the $100 million to $1 billion investments typically required for similar models by industry giants like Anthropic.

Alex Osaleh [00:57]: "...an artificial intelligence model from the Chinese company Deepseek has sparked a deep freakout among investors. Nvidia stock tumbled nearly 17%, wiping out about $593 billion from the company's market cap."

This breakthrough has not only affected AI-focused firms but has also reverberated across companies involved in AI infrastructure, including Oracle, Super Microcomputer, and TSMC. The broader market impact saw major U.S. stock indexes decline, with the Nasdaq falling by approximately 3%, and the S&P 500 decreasing by around 1.5%, although the Dow Jones Industrial Average edged up by nearly 0.7%.

3. Expert Insight: Asa Fitch on DeepSeek’s Technological Prowess

To unpack the implications of DeepSeek's advancements, the podcast features insights from Asa Fitch, a semiconductor analyst at The Wall Street Journal.

Asa Fitch [02:45]: "...Deepseek has been around for a couple of years, driven by an entrepreneur in China who's actually a hedge fund guy who does quant investing in China."

Fitch elaborates on what sets DeepSeek apart, particularly their ability to develop a sophisticated AI model with significantly reduced computational resources. Unlike giants like OpenAI, which have invested billions in GPUs and advanced chips, DeepSeek achieved comparable performance with less intensive hardware.

Asa Fitch [03:23]: "The interesting thing about this model really is how little it needed in terms of computing resources to do what it did."

Additionally, DeepSeek's open-source approach has garnered credibility and interest, allowing the broader tech community to examine and validate their methodologies.

Asa Fitch [04:46]: "It's not one of these Closed source things where everything's hidden... People can kind of see what they did. They can check their work and they can see that they used all these techniques to do what they did."

4. Market Reactions and Broader Economic Implications

Following the in-depth analysis with Fitch, Alex Osaleh engages with David Uberti, a markets reporter, to explore the broader ramifications of DeepSeek's announcement on the U.S. economy and stock market.

David Uberti [07:20]: "The market has been riding so high over the last year or two, in large part because of a lot of this AI hype."

Uberti explains that the surge in AI enthusiasm inflated stock valuations, particularly within the tech sector. DeepSeek's cost-effective AI model introduces doubts about the sustainability and real value of AI investments, leading to a market correction.

David Uberti [07:20]: "...whether the market has overvalued some of these stocks. If there is in fact a cheaper, more efficient way to do some of these things that AI models have been doing."

The ripple effect extends beyond direct AI companies to ancillary sectors like semiconductor manufacturing, data centers, and even energy suppliers. This interconnectedness underscores AI's pervasive influence across the economy.

David Uberti [08:35]: "It has really gone to show how wide reaching AI has been as a theme within Wall Street's sort of investment thesis."

Furthermore, Uberti highlights the potential long-term impacts, suggesting that if the market continues its downward trajectory, there could be a fundamental reassessment of how AI-related stocks are valued. The current sell-off has also prompted a flight to safer investments, evidenced by a rally in government debt treasuries.

5. Future Outlook: Anticipating Market Movements and Earnings Reports

As the episode progresses, Uberti shares his perspective on the uncertain future of the markets amid this correction. With major companies set to report earnings in the coming weeks, these reports will be pivotal in determining whether the current downturn is a temporary adjustment or indicative of a more profound market realignment.

David Uberti [09:15]: "Major companies are reporting earnings over the coming weeks. They will give us some insight into that and sort of answer these questions from the C suite for sure."

The potential reevaluation of stock valuations could lead to a broader shift in investment strategies on Wall Street, moving away from the heavily AI-centric portfolios that have dominated recent years.

6. Additional News Highlights

Beyond the primary focus on DeepSeek and market fluctuations, the episode briefly touches upon other significant news:

• Trump Administration's Impact on Tech: WSJ Global Tech Editor Jason Dean discusses how the new administration's policies favoring cryptocurrency and AI, alongside a more lenient stance on antitrust proceedings, could reshape Silicon Valley's landscape.

  Jason Dean [10:31]: "He's been very vocal about embracing policies that favor cryptocurrency and artificial intelligence."

• Justice Department Review: A top prosecutor has initiated an internal review of the Department of Justice’s decision to charge hundreds of January 6th defendants with felony obstruction offenses, following President Trump's recent pardons.

• Conflict in Congo: A Rwanda-backed rebel group has entered the city of Goma in the Democratic Republic of Congo, escalating a long-standing conflict and challenging the Trump administration's foreign policy commitments.

7. Conclusion

The episode encapsulates a critical moment in the tech industry, where advancements from a relatively unknown Chinese AI firm have instigated significant market turbulence. Through expert interviews and comprehensive analysis, WSJ What’s News provides listeners with an in-depth understanding of the immediate impacts and the potential long-term consequences for the U.S. economy and global tech landscape.

Produced by Pierre Bienname and Anthony Bansi, with supervising producer Michael Kosmides.

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Notable Quotes:

• Alex Osaleh [00:33]: "More than a trillion dollars have been erased from the US Stock market."

• Asa Fitch [03:23]: "The interesting thing about this model really is how little it needed in terms of computing resources to do what it did."

• David Uberti [07:20]: "The market has been riding so high over the last year or two, in large part because of a lot of this AI hype."

• David Uberti [09:15]: "Major companies are reporting earnings over the coming weeks."

Transcript

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[Alex Osaleh]

More than a trillion dollars have been erased from the US Stock market. Tech stocks dropped after China's Deep Seq released a cheaper AI model. Plus, is this the correction in AI stocks investors were expecting?

[David Uberti]

Today is one of the big first pullbacks against that theme that we've seen over the last year or two. And it has raised in a really big way whether the market has overvalued some of these stocks.

[Alex Osaleh]

And a top prosecutor has opened a review of the Justice Department's decision to charge hundreds of defendants of the January 6th riots. It's Monday, January 27th. I'm Alex Osaleh for the Wall Street Journal. This is the PM edition of what's news, the top headlines and business stories that move the world today. An artificial intelligence model from the Chinese company Deepseek has sparked a deep freakout among investors. Nvidia stock tumbled nearly 17%, wiping out about $593 billion from the company's market cap. Makers of AI infrastructure such as Oracle Super Microcomputer and TSMC also suffered deep declines that pushed several major U.S. stock indexes down, though the Dow edged nearly 0.7% higher. The Nasdaq fell about 3%, and the S&P 500 declined about 1.5%. The reason? A Chinese artificial intelligence company called Deepseek. Last week, the company put out a paper that said it had created an accurate AI model that it trained for relatively cheap about five and a half million dollars. Compare that to the $100 million to $1 billion it took to train a recent model from Anthropic. According to that company's CEO, the development has pulled the rug out from under global companies riding the AI wave, including chip makers, infrastructure suppliers and energy companies. As investors question the outlook for AI spending, this comes at the start of a busy week for earnings. Some of the biggest spenders on AI, such as Microsoft and Meta, are due to update investors. We'll see a bit later what explains the market's frenzy and what's to come. But first, let's talk a bit about the company behind it all. ASA Fitch, who covers Semiconductors for the Wall Street Journal joins us now. So, Asa, how much of a surprise is this? Did this company just come out of nowhere?

[Asa Fitch]

Well, it did and it didn't. In a sense, for a lot of people, it did come out of nowhere. They'd never heard of this company, Deepseek, but Deepseak has been around for a couple of years, driven by an entrepreneur in China who's actually a hedge fund guy who does quant investing in China. What really has caught people's attention is the release of a new model last week by Deepseek that could rival the performance of some of OpenAI's most sophisticated AI systems. So this was what really kind of led people to think, wow, there's something to this Chinese company and what they're doing, and it could disrupt the entire AI ecosystem.

[Alex Osaleh]

What is unique about this model that they just published this paper on?

[Asa Fitch]

The interesting thing about this model really is how little it needed in terms of computing resources to do what it did. These companies, like OpenAI, like the big tech companies, have been throwing billions upon billions of dollars around buying GPUs, these chips that are needed to train AI models. And what Deepseek did suggested that you can do the same sorts of things with less. So that's kind of what has led to kind of surge in interest in Deep Seq and the surge of worry around people who've invested in these, these companies at the forefront of AI.

[Alex Osaleh]

How did Deep Seq manage to come up with its product given the US Sanctions on exports of the most sophisticated chips to China?

[Asa Fitch]

Well, that's complicated. They have a bunch of chips, first of all, they have around 2,000 of some of Nvidia's chips that are available in the Chinese market. Still, they're not the most powerful chips the company makes. DeepSeek also had a large cluster of Nvidia's earlier generation of chips, before there were these export controls on. It's not really entirely clear how Deepseek was able to train up this big model and do these things with apparently fewer chips. Some of the papers that have been published suggest that they spent much less, but there are a lot of gaps in those assertions. We're not entirely sure yet exactly how much computing power deepseek needed, but everybody pretty much is impressed with what they've been able to do.

[Alex Osaleh]

Nonetheless, what can we make of the fact that DeepSeek's code is open source?

[Asa Fitch]

That's another thing that's really been impressive to a lot of people. It's not one of these Closed source things where everything's hidden behind a wall and they claim this performance and so on and so forth. People can kind of see what they did. They can check their work and they can see that they used all these techniques to do what they did. And it seemed to have worked out. So that in itself is pretty notable and gives them more credibility because it's all been done out there in the open.

[Alex Osaleh]

So given the sort of freakout in the broader tech sector, semiconductor companies today, where do we go from here?

[Asa Fitch]

Well, the real question is how much these techniques actually apply to other models. And if you look at this question about the broader impact, the answer really revolves around how much the rest of the world adopts the same strategies. I mean, it is open source, as we were talking about before, and that means that anybody else can use the same techniques and then what that means for the general need for computing power for these things. If you look at some analyses of situation, some people say it may not mean very much at all. I mean, we still may need to develop very, very big models. Maybe we can do that more efficiently. But another way of looking at it is that as people continue to use these models, the work shifts toward actually deploying them. You know, if you have all these consumers in the world using these things, even if you don't need as much computing power to train these things, you're still going to need an increasing amount of computing power to maintain and to deploy them.

[Alex Osaleh]

That was WSJ reporter Asa Fitch. Asa, thank you so much.

[Asa Fitch]

Thank you.

[Alex Osaleh]

Coming up, markets have been rattled. Where might they go from here? That's after the break.

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[Alex Osaleh]

Deep Seek's impact on the stock market today isn't just limited to tech companies, but what investors want to know is will the slump stick around? Here to talk about it is David Uberti, who covers markets for the Wall Street Journal. David, what about this has got the market so spooked?

[David Uberti]

Well, the market has been riding so high over the last year or two, in large part because of a lot of this AI hype. And the big question surrounding it all has been how price all of this what is the actual value that AI brings to the broader US economy and compared to earnings through corporate earnings statements and such. Today is one of the big first pullbacks against that theme that we've seen over the last year or two. And it has raised in a really big way whether the market has overvalued some of these stocks. If there is in fact a cheaper, more efficient way to do some of these things that AI models have been doing. That is why we're seeing a bit of this correction here in trading today. Furthermore, we're seeing sort of the broad tentacles of the AI trade throughout the US economy. It's not just the big tech firms, it's also the so called picks and shovels of the AI booms. Obviously Nvidia is the poster child for that. But companies that produce servers, that produce data centers, that produce cooling systems and power systems for data centers, nuclear power producers, even natural gas futures, those have all been affected by the sort of like changing dynamics of this trade. So it remains to be seen how it will play out in the next couple of days.

[Alex Osaleh]

What explains this broad reach throughout the market?

[David Uberti]

It has really gone to show how wide reaching AI has been as a theme within Wall Street's sort of investment thesis. And the broader US economy, which is very much digitizing and very tech focused over the last few years in particular as well. And as I said earlier, a lot of these stocks, detractors from them have been saying for some time that they've been overvalued. So in some ways the market was sort of primed for a moment like this. At the very least for them to be tapping the brakes to see what happen next with the next round of earnings reports. But it could also be a more fundamental sort of reevaluation of how these things are valued.

[Alex Osaleh]

So is this the correction that some investors were expecting or does it look a little different?

[David Uberti]

That's certainly what we will sort of understand over the next few days or so. Major companies are reporting earnings over the coming weeks. They will give us some insight into that and sort of answer these questions from the C suite for sure. You know, more broadly, the bigger question is because markets have become so top heavy with a lot of these AI related stocks. If this does become this broader correction, you will see a broader reorientation of what's sort of happening on Wall street even today with this sort of stock market sell off. You also saw a rally in government debt treasuries, which sort of suggests that investors are sort of fleeing for safety, at least in this particular moment in time. So it's an open question as to whether it will continue.

[Alex Osaleh]

That was markets reporter David Uberti. Thanks, David.

[David Uberti]

Thanks for having.

[Alex Osaleh]

Speaking of tech, the new Trump administration is shaping up to have profound effects across the tech industry, from regulation and policy to AI investment and development, to several high stakes antitrust cases against tech giants Google and Meta. In a special series that kicked off today, our Tech News Briefing podcast will be looking at what Trump means for tech. In the first episode, WSJ Global Tech editor Jason Dean talked about some of President Trump's policy changes that could affect Silicon Valley.

[Jason Dean]

I mean, you can see some of them already. He's been very vocal about embracing policies that favor cryptocurrency and artificial intelligence. It wasn't like the Biden administration was anti AI, but they weren't quite as fulsome in their embrace and obviously they were quite tough on the crypto industry. And that's a sector that venture capital firms in Silicon Valley have invested enormous sums in and have a lot at stake. I'm sure they hope that these antitrust suits they're facing might go away or at the very least that there won't be stricter enforcement or continued strict enforcement of antitrust regulations so that there might be an ability to do more deals which could be beneficial both for the big companies and for the investors in startups who could see exits on their investments and have really been constrained in that over the last four years.

[Alex Osaleh]

That was Wall Street Journal's Global Tech Editor Jason Dean. And you can listen to our special series, what Trump Means for Tech, every day this week on our Tech News Briefing podcast. In other news, we exclusively report that a top prosecutor has opened an internal review of the Justice Department's decision to charge hundreds of January 6th defendants with felony obstruction offenses. People familiar with the matter said that Acting U.S. attorney Ed Martin, who was appointed by President Trump, asked prosecutors in an email today to turn over files, documents, notes, emails and other information related to the cases. Justice Department spokespeople had no immediate comment. Trump pardoned virtually all of the January 6th defendants last week. A Rwanda backed rebel group has entered the Congolese city of Goma, threatening a bloody new chapter in a 30 year conflict set off by the 1994 genocide. The city of Goma sits on Congo's border with Rwanda and is a longtime international aid hub and safe haven for civilians. Its residents have reported gunfire and heavy shelling. Rwanda's Foreign Ministry denied that its forces were involved in the conflict. An extended battle for Goma could become an early test for the Trump administration and its willingness to intervene in a war involving one of America's closest allies in Africa. And that's what's news for this Monday afternoon. Today's show was produced by Pierre Bienname and Anthony Bansi, with supervising producer Michael Kosmides. I'm Alex Osola for the Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening.