The S&P 500 and Nasdaq Composite were down sharply Monday on concern about an artificial intelligence stock bubble popping because of the emergence of Chinese startup DeepSeek, which has possibly made a competitive AI model for a fraction of the billions Silicon Valley is spending.

The Nasdaq Composite lost 3.07%, falling to 19,341.83, and the S&P 500 slid 1.46% to 6,012.28. The Dow Jones Industrial Average
added 289.33 points, or 0.65%, to close at 44,713.58. Gains in Apple Johnson & Johnson and Travelers helped lift the 30-stock index.

Last week, DeepSeek released R1, an open-source reasoning model that reportedly outperformed OpenAI's in several tests, and has climbed the charts at app stores. DeepSeek said the initial version of its large language model, launched in late December, cost less than $6 million to design. While Wall Street questions that figure, the startup's claims are nonetheless raising concerns that big AI models could be built out with much less investment.
AI darling Nvidia dropped 16.9%, Broadcom lost 17.4%, and AMD shed 6.4%. Microsoft lost 2.1%. Palantir was hit for 4.4%.
Derivative plays from the AI buildout such as power providers also suffered. Constellation Energy lost nearly 21%, while Vistra dropped 28%.

"It's a good example of selling first and asking questions later, and investors sort of feeling that valuations are a bit stretched for technology in general and for semiconductors in particular," said Sam Stovall, chief investment strategist at CFRA Research. "We're going to have volatility, especially when we're dealing with a richly valued market and exogenous events."

On the other hand, a rotation into more defensive areas of the market helped ease Monday's losses.

"What I've also been encouraged by is investors are not bailing out of stocks necessarily, but are rotating into the defensive areas, like consumer staples, health care, real estate," Stovall added. "The market at least seems to be coming back."

Monday's sharp declines come as traders brace for a major week, with "Magnificent Seven" members Meta Platforms, Microsoft, Tesla and Apple all due to report their latest quarterly results.

On top of that, the Federal Reserve will hold its first policy meeting of the year, deciding on the level of interest rates Wednesday. Fed funds futures are pricing in a 97% chance that the central bank leaves interest rates unchanged, according to CMEGroup's FedWatch Tool.(Cay) Newsmaker23

Source: CNBC