DeepSeek came out of nowhere to challenge U.S. supremacy in AI. Xi Jinping publicly celebrated the nation’s most prominent entrepreneurs from Jack Ma to Liang Wenfeng. Shares in China’s biggest tech firms staged their headiest rally since 2020.

As the year’s first quarterly earnings season got underway this week, investors got a wake-up call.

Alibaba Group Holding Ltd. shares plunged their most in more than a month Friday after disappointing investors who anointed the e-commerce leader one of the frontrunners in the DeepSeek-inspired AI boom. JD.com Inc. and Tencent Holdings Ltd. posted their fastest revenue growth since COVID-era heights—but that followed years of sub-par growth as they struggled with a Chinese downturn and a debilitating government crackdown. Both are on track for share losses since their reports.

To be fair, Beijing’s stimulus measures and a plethora of government spending incentives are propping up consumption—Alibaba’s giant e-commerce operation outperformed in the March quarter, in one clear example.

But with Meituan and PDD Holdings Inc. yet to report, the initial numbers suggest that investors might’ve gotten ahead of themselves. Chinese consumers and corporations are still holding back, wary of the turbulence brewing abroad as Donald Trump wages his trade war. At home, Alibaba, JD and Meituan—eager to rekindle growth—are sacrificing margins to expand into everything from faster delivery to food. 

All that is raising alarm bells for investors as the initial excitement over China’s AI advances fades.

“This earnings season was a reminder that market expectations had perhaps run ahead of on-the-ground realities—both in terms of China’s consumption recovery and the pace of AI monetization,” said Charu Chanana, chief investment strategist at Saxo Markets. 

“China Big Tech is still navigating a transition phase, and the path to re-rating needs more than just efficiency gains. It needs a durable growth narrative,” she said.

Before this week, analysts’ earnings estimates for the Hang Seng Tech Index—which includes all the big names—had risen more than 30% in the past year, outpacing the broader market.  

China’s tech sector has been seen as largely resistant to the impact of tariffs given its focus on local consumer spending. Mainland China accounts for 90% of Tencent’s revenue, for example. At the same time, the trade war’s broader macro impact has clouded the outlook for consumption.

“Broadly speaking, consumption appeared to be resilient domestically,” said Kok Hoong Wong, head of the institutional equity sales trading at Maybank Securities Pte. But “investors remain cautious going forward, with headwinds expected from the ongoing trade woes.”

Demand in the home market itself is still on shaky ground, and other internal factors are posing concerns for investors. JD has declared war on Meituan and Alibaba in food delivery. And JD and Alibaba are investing heavily in instant-delivery of everything from cosmetics to smartphones.

The stage is set for a margin-eroding competition reminiscent of the go-go era that prompted a crackdown from Beijing.

“The on-the-ground reality in China is different—things are improving but it is a very slow consumption recovery,” said Sat Duhra, a portfolio manager at Janus Henderson Investors.

A cutthroat battle in retail isn’t the only concern. For all the optimism around DeepSeek’s breakthrough, it may take time for AI to deliver fruit.

Analysts peppered Alibaba, Tencent and JD with questions about how they would deliver profits from the technology. Executives talked about how AI should elevate or enhance everything from advertising to design and shopping. But they turned cautious when quizzed about actual revenue impact.

Tencent waved off worries that Chinese firms may run out of the Nvidia Corp. chips that are vital to AI development. Uncertainty remains over U.S. plans to contain China’s tech ascendancy through such measures as choking off the flow of high-end chips.

Still, investors preach patience as Alibaba, Tencent and others build on DeepSeek’s advances and weave AI into their already powerful offerings. That’s particularly as Beijing throws its weight behind efforts from China’s biggest tech firms and a clutch of ambitious startups to out-do the likes of OpenAI and Google.

“As the performance of DeepSeek has demonstrated, it would be somewhat naive to think China is not developing world-class technologies behind the scenes following years of investment and the drip feed announcements on this front has the ability to maintain interest in the sector,” said Janus Henderson’s Duhra.