Chip stocks and other artificial-intelligence-related names sold off sharply Monday after Chinese AI lab DeepSeek revealed that a new version of its AI model has less need for semiconductors.
The news has potentially significant implications across a wide range of stocks, from semiconductor designers and makers to utilities seen as benefitting from booming electricity demand for data centers.
Following a selloff in Europe, key US-listed stocks such as Nvidia NVDA and Broadcom AVGO fell sharply after the US market open. Both semiconductor giants were down more than 16% in midmorning trading.
The Morningstar US Market Index slid 1.87%, with losses spreading across sectors including energy and utilities. The Morningstar US Utilities Index fell 4.8%, with power giant Vistra Corp VST posting losses of more than 25%.
Bitcoin and other cryptocurrencies also stumbled Monday morning.
Why Are AI Stocks Selling Off?
“The investment case for the AI supply chain until now was that more spending led to better outcomes for AI models,” says says Morningstar equity analyst Javier Correonero. “Big tech firms Microsoft MSFT, Alphabet GOOGL/GOOG, Amazon AMZN, and Meta Platforms META have deployed hundreds of billions to purchase GPUs from Nvidia and ensure chip supply to satisfy the insatiable demand for AI.”
Tech Stock ETFs Slide
The broader market slid, with the the $636 billion SPDR S&P 500 ETF Trust SPY down by 1.4% and the tech-heavy Nasdaq hit harder, with the $332 billion Invesco QQQ Trust QQQ falling 2.2%. Growth stocks suffered more than value, as the $109 billion iShares Russell 1000 Growth ETF IWF declined 2.2%, compared with the mere 0.3% for the $63 billion iShares Russell 1000 Value ET IWD. Small-cap stocks also weathered the downturn better, with the $74 billion iShares Russell 2000 ETF IWM ticking down 0.1%
The utility sector, buoyed by AI exuberance in 2024, was hit worst, with the $18 billion Utilities Select Sector SPDR ETF XLU down 4.4%. Tech was hurt next worst, with the $75 billion Technology Select Sector SPDR ETF XLK, sliding 3.6%. Consumer defensives did the best, with the $17 billion Consumer Staples Select Sector SPDR ETF XLP up 1.5%.
The pain was particularly concentrated in the chip industry, with the $26 billion VanEck Semiconductor ETF SMH falling 7.5%. AI makes up one of the primary markets for new chips. However, some of the worst pain was felt in the nuclear energy industry, which has seen a resurgence thanks to energy demand from tech, with the $1.1 billion VanEck Uranium & Nuclear ETF NLR falling 9%
AI ETFs varied wildly in terms of performance, with the $2.9 billion Global X Artificial Intelligence & Tech ETF AIQ only sliding 1.6%, while the $882 million iShares Future AI & Tech ETF ARTY fell 6.3%
Rewriting the AI Spending Model
Morningstar thematic ETF expert Kenneth Lamont explains how DeepSeek could signal a move away from “brute-force computing power” and rewrite the investment case for AI. “Until now, the conventional wisdom has been clear: The best AI models rely on massive datasets and immense computational power, rewarding scale and favoring hardware giants like Nvidia and ASML,” he says. “But DeepSeek’s latest innovations are turning that assumption on its head. The startup’s new models demonstrate how efficiency gains in AI development can reduce reliance on brute-force computing power. This breakthrough slashes computational demands, enabling lower fees and putting pressure on industry titans like Microsoft and Google to justify their premium pricing.”
Less Power-Hungry AI Weighs on Grid Companies
“Shares in Siemens Energy ENR have fallen 20%, part of a broader selloff for companies with exposure to electricity consumption and AI,” observes Morningstar analyst Matthew Donen. News about DeepSeek “has raised questions about the true cost of AI models, which initially appeared to be extremely energy-intensive. Should the cost decline, as Deepseek’s model implies, the market’s expectations of electricity consumption will decline.”
Donen adds: “Siemens benefits from increasing electricity consumption through the sales of its gas turbines and high-voltage electricity equipment. French electrical infrastructure groups Legrand LRRVF and Schneider Electric SU declined 9% and 6%, respectively.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
