It's been a rough start to the week for tech investors, with the Nasdaq Composite Index (NASDAQ: .IXIC) closing down a sharp 3.1% on Monday.
That's more than twice the 1.5% losses posted by the S&P 500 Index (SP: .INX).
We're seeing a similar story playing out in the Aussie market today. Struggling ASX tech stocks are dragging the S&P/ASX All Technology Index (ASX: XTX) down 1.7%, compared to the modest 0.2% dip in the All Ordinaries Index (ASX: XAO).
The big US tech sell-off is clearly visible in the performance of the Betashares Nasdaq 100 ETF (ASX: NDQ) on Tuesday.
Shares in the ASX exchange-traded fund (ETF), which aims to track the Nasdaq-100 (NASDAQ: NDX), are down 2.5% in morning trade today. Though following the stellar run the big US tech companies have enjoyed, NDQ shares remain up more than 25% since this time last year.
So, why did investors pressure US tech stocks overnight?
Nasdaq plunges on Chinese AI competition jitters
The ASX was closed on Monday in honour of the Australia Day holiday. But US stock markets were open for business as usual.
And investors kicked off their week with news that Chinese open-source artificial intelligence (AI) developer DeepSeek had launched a low-cost generative AI model that could upend US dominance in the space.
With DeepSeek's AI model rising to the top of Apple's app store, shares in generative AI chip maker Nvidia Corporation (NASDAQ: NVDA) plunged 16.9%. The history making US$589 billion drop in Nvidia's market cap was in itself a sizeable drag on the Nasdaq.
As for some of the other tech behemoths, Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) shares closed down 4.03%, Tesla Inc (NASDAQ: TSLA) shares fell 2.2%, while Apple Inc (NASDAQ: AAPL) shares went the other way, closing up 3.2%.
What are the experts saying?
Investor focus was already on the Nasdaq this week, with reporting season in the US in full swing. But as Morgan Stanley's Chris Larkin pointed out, the week just got even bigger.
"What was shaping up to be a big week in the markets got even bigger with the disruption in the AI space," Larkin said (quoted by Bloomberg). "That could make this week's mega-cap tech earnings even more critical to market sentiment."
Interactive Brokers' Steve Sosnick noted that investors have been complacent in their AI assumptions. He said:
The sudden, adverse market reaction to DeepSeek indicates that some of the key assumptions that have been driving the AI trade, and hence major indices, are getting reassessed today. Part of the today's sudden adverse market reaction was a direct result of a 'wave of complacency' that overtook the equity market.
Murphy & Sylvest Wealth Management's Paul Nolte added (quoted by Bloomberg):
We don't know whether this is the 'Sputnik Moment' for stocks, but this is certainly a wake-up call that we are not the only game in town," "To put these very high valuations in the stocks thinking they have cornered the market is a huge mistake and that is being re-rated.
And Ritholtz Wealth Management's Callie Cox said the overnight Nasdaq plunge should prod investors to look outside the tech space and AI companies to other quality opportunities.
According to Cox:
I'm hoping this moment encourages everyone to look beyond tech stocks. Not because the AI story is doomed, but because there are so many opportunities in unloved sectors that have been ignored for so long.
The guts of the market's foundation are still good, so it's likely that the dip will be bought here.
