The stunning success of Chinese AI startup DeepSeek triggered a bloodbath for tech stocks on Monday as Wall Street reacted to fears the newcomer could challenge U.S. leaders in the field. After a massive selloff, you may be tempted to cut your losses—or avoid this volatile sector altogether. Several analysts, however, urge calm and say now could even be the time to take advantage of the pullback to buy powerhouse companies poised for long-term success.
To be clear, a correction in a market full of frothy valuations was probably overdue. It’s not unreasonable for investors, the analysts said, to question whether the AI spending boom that has swept through Silicon Valley—Bloomberg Intelligence has said Big Tech capital expenditure could hit $200 billion in 2025—will generate adequate returns.
“I think overall, the moves that you saw in the market made sense,” said Angelo Zino, a senior tech analyst at CFRA Research. “Maybe the magnitude of the moves didn’t make as much sense.”
The wild swings in prices are indicative of a turbocharged, highly speculative market reacting to press releases (including reports from DeepSeek), said Ted Mortonson, a managing director and tech sector strategist at Baird, rather than any proven change in fundamentals.
“It’s overblown,” Mortonson said during the selloff Monday. “I don’t know if it’s a Sputnik moment,” he added, referring to comments from venture capitalist Marc Andreessen that compared DeepSeek’s success to when the Soviet Union beat the U.S. to launching a satellite into space.
Wedbush Securities’ Dan Ives, one of Wall Street’s most famous tech bulls, emphasized that DeepSeek’s staggering claims—that it built its R1 model for just $6 million with solely reduced-capacity chips—are at least deeply misleading and probably untrue. He compared the news to an elementary school parent finding out that another kid’s art project was really constructed by an engineer or architect at home.
“We continue to view this is [as] a golden buying opportunity that will not change the AI spending trajectory of the AI Revolution,” Ives and colleagues wrote in a note Tuesday.
Semiconductor industry under pressure
Still, the damage on Wall Street was staggering, despite a sturdy recovery on Tuesday. Shares of chip behemoth Nvidia, which has occasionally been the most valuable company in the world, shed $593 billion in market cap as shares declined 17% on Monday, a record one-day loss in U.S. stock market history. (By Tuesday afternoon, shares had recovered over 6% from Monday’s close.)
That headlined a brutal start to the week for fellow chipmakers. Nvidia and competitor Broadcom, which also saw its shares decline roughly 17% (they had risen slightly Tuesday), were the biggest drags on the tech-laden Nasdaq, which fell 3%. But the semiconductor industry was particularly hammered as the benchmark SOX index plunged over 9%, its biggest single-day drop since 2020.
By Tuesday afternoon, the Nasdaq had jumped nearly 2%, while the SOX had only gained slightly.
Mortonson said he had never witnessed a bigger discrepancy between the panic in semis compared with the much more moderate selloff across the rest of tech, including software. The bear case for semis is that DeepSeek has completely upended the assumption that making better large language models requires paying steep prices for Nvidia’s most advanced AI chips—or equally sophisticated alternatives from competitors.
That thesis might not play out, however, if the Jevons paradox comes into play. Microsoft CEO Satya Nadella cited the economic theory on Monday as both he and former Intel CEO Pat Gelsinger pointed out that DeepSeek’s supposed breakthroughs, which might dramatically slash the cost of AI adoption, could cause overall demand for compute power to rise.
“The markets are getting it wrong,” Gelsinger said on X.
Wisdom is learning the lessons we thought we already knew. DeepSeek reminds us of three important learnings from computing history:
— Pat Gelsinger (@PGelsinger) January 27, 2025
1) Computing obeys the gas law. Making it dramatically cheaper will expand the market for it. The markets are getting it wrong, this will make AI…
Mortonson agreed. If you sell Nvidia or semiconductor leaders like Broadcom, TSMC, and Marvell, he said, “you do not know what you’re talking about.”
Nonetheless, investors do not want to be as exposed to semis as they were in years past, Zino said. He believes 2025 will be the year the sector finally trails software, though he said the biggest beneficiaries of an AI-driven world should include leading chipmakers like Nvidia and Silicon Valley tech giants such as Microsoft, Alphabet, and their peers in the so-called Magnificent Seven.
“You definitely want to be more diversified across different areas of tech, including Big Tech, semis, as well as software,” he said.
Investors will need to be smart about when they get in and out of these names, he added, as they navigate market cycles.
