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DeepSeek sparked a sharp sell-off within financial markets this week. The Chinese artificial intelligence company announced it had developed and released an open-source artificial intelligence (AI) model. DeepSeek’s model is reportedly low-cost, with fewer computing demands using lower-end chips, while maintaining the equivalent performance of much more expensive and compute hungry models. The news hit the shares of companies exposed to AI capital spending from semiconductors to electrical equipment and utilities, as well as bond yields and foreign exchange rates.
On Monday following the announcement, the Philadelphia Semiconductor Index declined 9%, while American AI leader Nvidia fell 17%. Prices have recovered somewhat since. The chart of the week below shows how the US semiconductor sector has now fallen back to where it was around November of last year. It also shows that it peaked in absolute and relative terms in mid-2024.
Opinions differ on how the DeepSeek developments will impact the AI ecosystem. This includes the need for infrastructure, for example: data centres and the use of high-end chips which need dependable electricity supplies. More efficient than assumed models could have a lower total spend, or they could proliferate end uses, which would still require the current investment forecasts. The situation bears monitoring, but it is too early to assess the implications of DeepSeek on the AI ecosystem.
