January 27, 2025
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U.S. stocks tumbled in early Monday trading, with tech stocks leading across-the-board declines, following weekend developments that suggest a China-backed AI chatbot could outperform U.S. rivals with a lower cost base and fewer high-end processors.
Updated at 9:33 AM EST
The S&P 500 was marked 117 points, or x1.92% lower in the opening minutes of trading, with the Nasdaq falling 685 points, or 3.44% to wipe out all of its gains for the year.
The Dow Jones Industrial Average slumped 280 points while the mid-cap Russell 2000 fell 23 points, or 1%.
Updated at 7:29 AM EST
The CBOE Group's VIX index, often referred to as Wall Street's fear gauge, surged to the highest levels in more than a month amid the roiling premarket volatility in tech stocks tied to the launch of China-based AI chatbot DeepSeek.
The VIX index was last marked 43.6% higher in after-hours trading at $21.56, a level that suggests traders are expecting daily moves for the S&P 500 of of 1.35%, or 82 points, each day for the next 30 days.
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DeepSeek, a China-based startup that has reportedly used Nvidia's ( NVDA ) lower-end H800 chips to build an AI training model for less than $6 million, overtook OpenAI's ChatGPT chatbot as the world's most-downloaded AI tool on the Apple ( AAPL ) App Store this weekend.
The Hangzhou-based group claims its free-to-use, open-sourced chatbot can outperform U.S. rivals at a small fraction of the cost. If that statement is correct, the chatbot could cast enormous doubt on the business models of tech giants such as Microsoft ( MSFT ) , Meta Platforms ( META ) , Amazon ( AMZN ) and Google parent Alphabet ( GOOGL ) , which collectively have committed around $300 billion in capital spending this year alone.
Nvidia shares were marked 13.8% lower in premarket trading following the DeepSeek reveal, with Microsoft falling 6.8% and Meta falling 4.6%.
"The investment case for the AI supply chain until now was that more spending led to better outcomes for AI models. Big tech firms Microsoft, Google, Amazon and Meta have deployed hundreds of billions to purchase GPUs from Nvidia and ensure chip supply to satisfy the insatiable demand for AI," said Javier Correonero, equity analyst at Morningstar. "Deepseek is challenging that hypothesis."
The moves come at bad time for the broader market as well, which will navigate a busy week, with 103 S&P 500 reporting December-quarter earnings and the first Federal Reserve rate meeting of the year.
Markets are also nervously assessing the impact of President Donald Trump's decisions to slap a 25% tariff on goods imported from Colombia after that country's president refused to accept a flight filled with people recently deported under Trump's new immigration crackdown.
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Colombia eventually agreed to accept the flights, with Trump saying the tariffs were now "placed in reserve. But Trump's willingness to wield such a blunt instrument in bilateral negotiations will raise the specter of further, and unpredictable, uses of the threat in the future.
Bond markets reflected both that caution and the larger implications of the tech-stock collapse, with benchmark 10-year note yields falling 10 basis points to a Jan. 2 low of 4.521%.
"What was shaping up to be a big week in the markets got even bigger with the disruption in the AI space" said Chris Larkin, managing director for trading and investing at E*Trade from Morgan Stanley.
"That could make this week’s megacap tech earnings even more critical to market sentiment. And while no one expects a rate cut rate on Wednesday, everyone will be looking for some signs of longer-term dovishness from the Fed," he added. "But don’t forget surprises out of Washington. The Colombia tariff spat may increase concerns that the Trump administration will be more aggressive on this front than previously thought."
On Wall Street, the major tech selloff has futures contracts tied to the Nasdaq, which is up 3.33% for the year, looking at an opening bell decline of more than 1,000 points in heavy premarket volume.
The S&P 500, which rose 1.74% last week, is called 135 points lower with the Dow Jones Industrial Average braced for a 370-point decline.
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In overseas markets, Europe's Stoxx 600 was marked 0.63% lower in early Frankfurt trading, with chip-design group ASML ( ASML ) leading the broader declines with a 10.5% slump. Britain's FTSE 100 fell 0.22% in London.
Overnight in Asia, Japan's Nikkei 225 slumped 0.92% in Tokyo with the regional MSCI ex-Japan benchmark falling 0.29% into the close of trading.
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