Tech stocks tank as a Chinese competitor threatens to upend the AI frenzy

NEW YORK —  Wall Street’s superstars tumbled Monday as a competitor from China threatens to upend the artificial-intelligence frenzy they’ve been feasting on.

The Standard & Poor’s 500 dropped 1.5%, dragged down in large part by a 17% fall for Nvidia. Other Big Tech stocks also took heavy losses, and they pulled the Nasdaq composite down 3.1% for its worst loss in more than a month.

The damage was focused on AI-related stocks, while the rest of the market held up much better. The Dow Jones industrial average rose 0.7%, and the majority of U.S. stocks climbed. But anyone holding an S&P 500 index fund, which are found in many 401(k) accounts, felt the pain because of how influential those tech giants have become on indexes.

The shock to financial markets came from China, where a company called DeepSeek said it had developed a large language model that can compete with U.S. giants but at a fraction of the cost. DeepSeek’s app had already hit the top of Apple’s App Store chart by early Monday, and analysts said such a feat would be particularly impressive given how the U.S. government has restricted Chinese access to top AI chips.

Skepticism, though, remains about how much DeepSeek’s announcement will ultimately shake the AI supply chain, from the chip makers making semiconductors to the utilities hoping to electrify vast data centers running those chips.

“It remains to be seen if DeepSeek found a way to work around these chip restrictions rules and what chips they ultimately used as there will be many skeptics around this issue given the information is coming from China,” said Dan Ives, an analyst with Wedbush Securities.

DeepSeek’s disruption nevertheless rocked stock markets worldwide.

In Amsterdam, Dutch chipmaking equipment company ASML slid 7%. In Tokyo, Japan’s Softbank Group lost 8.3% to pull closer to where it was before leaping on an announcement trumpeted by the White House that it was joining a partnership to invest up to $500 billion in AI infrastructure.

And on Wall Street, Constellation Energy lost more than a fifth of its value, 20.8%. The company has said it would restart the closed Three Mile Island nuclear power plant to supply power for data centers for Microsoft.

All the worries sent investors toward bonds, which can be safer investments than any stock. The rush sent the yield of the 10-year Treasury down to 4.52% from 4.62% late Friday.

It’s a sharp turnaround for the AI winners, which had soared in recent years on hopes that all the investment pouring in would remake the global economy and deliver gargantuan profits along the way. Such stellar performances also raised criticism that their stock prices had gone too high, too fast.

Before Monday’s drop, which was its worst since the 2020 COVID crash, Nvidia’s stock had soared from less than $20 to more than $140 in less than two years.

Other Big Tech companies had also joined in the frenzy, and their stock prices had benefited too. It was just on Friday that Meta Platforms Chief Executive Mark Zuckerberg was saying he expects to invest up to $65 billion this year, while talking up a massive data center Meta is building in Louisiana.

A small group of such companies has become so dominant that they’ve come to be known collectively as the Magnificent Seven. These companies — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — alone accounted for more than half the S&P 500’s total return last year, according to S&P Dow Jones Indices.

Their immense sizes in turn have also given them huge sway over the S&P 500 and other indexes that give more weight to bigger companies. It shows the risk of betting too much on just a few winning stocks, something that market experts call “concentration risk.”

All told, the S&P 500 fell 88.96 points to 6,012.28. The Nasdaq composite dropped 612.47 points to 19,341.83, and the Dow rose 289.33 points to 44,713.58.

Brian Jacobsen, chief economist at Annex Wealth Management, suggested not overreacting to Monday’s sharp swings.

“It is possible that the news out of China could be overstated and then we could see a reversal of the recent market moves,” Jacobsen said. “It is also possible that the news is true, but then that would present new investment opportunities.”

More big swings may be ahead. Apple, Meta Platforms, Microsoft and Tesla are all scheduled to report quarterly earnings this week.

The pressure is on companies to keep delivering strong profits, particularly after a recent jump in Treasury yields. When bonds are paying more in interest, they put downward pressure on stock prices. Yields have been on the rise amid a solid U.S. economy and worries about possibly higher inflation coming from tariffs and other policies favored by President Trump.

So far, big U.S. companies have been reporting better results than analysts expected. AT&T became the latest on Monday, and its stock rose 6.3%.

In stock markets abroad, movements for broad indexes across Europe and Asia weren’t as forceful as for the big U.S. tech stocks. Stocks edged 0.1% lower in Shanghai after a survey of manufacturers showed export orders in China dropping to a five-month low.

Choe writes for the Associated Press. AP writers Matt Ott and Elaine Kurtenbach contributed to this report.