DeepSeek sparks US tech carnage—what’s next?

DeepSeek prompted US tech unwind

DeepSeek has no doubt emerged as the dominant theme for market sentiments overnight, with concerns that its cost-efficiency, performance capability and use of lower-tier chips could put US tech dominance at risk. Key features such as its 8-bit precision, multi-token predictions and Mixture of Experts (MoE) optimisation stood out as the foundation behind its capability, and seemingly as a nod of approval, NVIDIA called it “an excellent artificial intelligence (AI) advancement”, which may further unsettle sentiments.

There may be some “sell first, think later” thinking at play, with opinions still divided on whether DeepSeek will eventually be the ‘gamechanger’ that reshapes the US AI landscape. But if anything, market participants dislike uncertainties and are clearly unwilling to take the risks in the near term. The Nasdaq closed more than 3% lower, although this points to some recovery from an initial 5% drop in the pre-market session.

Rather than a full-on reversal, the broader narrative also points to a rotation, with market participants seeking shelter in defensives such as healthcare (+2.2%) and consumer staples (+2.9%). This highlights selective risk appetite in place and potential opportunities for the laggards. The Magnificent Seven stocks also saw Apple (+3.2%) and Meta (+1.9%) holding up.

What’s next?

If DeepSeek proves to be the ‘disruptor’ it made out to be, the implications could mean reduced chip demand, overspending in US AI, weaker US chip pricing power, all of which calling for the need to reassess current US tech lofty valuation. Overcrowded long-tech positioning may likely exacerbate the sell-off overnight, but with the initial shock to DeepSeek behind us, we may potentially keep a lookout for any near-term recovery price action as major tech names close in on key support levels.

NVIDIA have bear the brunt of the sell-off, plunging by close to 17% overnight, its biggest one-day loss in market capitalisation in history. The US$116-US$120 range seems to be a crucial support zone to defend, where confluence could be found from its 200-day moving average (MA), along with an upward trendline support. Any failure for the confluence zone to hold up may see a deeper retracement towards the US$102.00 level next.

For the Nasdaq, having traded within a broad falling channel since August 2024, a recent dip towards the lower channel trendline has been met with some dip-buying, which aligns with its daily Ichimoku Cloud support. Staying above the channel support around the 20,630 level will be key now, which may still keep the broader upward trend intact. A key test for buyers will be to reclaim yesterday’s high at the 21,600 level, which will show some indication of market participants looking beyond DeepSeek’s concerns.

What to watch ahead?

Market participants will now be assessing whether recent sell-off was an overreaction. In a way, there may be some positives out of it, with DeepSeek’s open-source format allowing developers worldwide to modify and improve them, which may accelerate the pace of AI adoption across industries and hence increasing overall demand.

For US tech companies, key advantages remain in areas like hardware, infrastructure, talent pool and capital, allowing them to innovate and maintain their leadership. With the initial market response delivered, the spotlight is now turned to upcoming earnings calls, where megacap tech companies are expected to address these developments and provide reassurances about their ability to stay ahead in the AI race.

US-China geopolitical relationship remains a key to watch as well, with the diverging economic conditions and trade dynamics leaving US with the upper hand. In the scenario where DeepSeek eventually proves to be a threat, we could see US utilising its tools to safeguard its tech dominance, be it in terms of expanding export restrictions to lower-tier chips or implementing higher tariff rates on China’s tech exports. With many moving parts ahead, heightened vigilance will be essential.