The recent sell-off in tech stocks triggered by concerns over Chinese AI startup DeepSeek has been labeled a “head fake” by Wedbush analyst Dan Ives. The sharp decline, which saw Nvidia (NASDAQ:NVDA) lose nearly $600 billion in market value in a single session, was fueled by fears that DeepSeek’s low-cost AI model could disrupt established AI giants. However, Ives and other analysts believe the panic is exaggerated and presents a prime buying opportunity for long-term investors.
What Sparked the Market Panic?
DeepSeek’s AI model, developed at a fraction of the cost of its Western counterparts, raised alarms about potential disruptions in AI hardware demand. Investors feared that its ability to operate without Nvidia’s cutting-edge GPUs could undermine the long-term growth of AI chipmakers. However, experts argue that cheaper AI models will ultimately drive greater adoption, benefiting the broader AI ecosystem rather than replacing key players like Nvidia, Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN).
Analysts Dismiss Competitive Threat
Despite the initial market reaction, analysts emphasize that DeepSeek’s breakthrough is unlikely to change the spending trajectory in AI. Ives noted that enterprises remain committed to seven- and eight-figure AI budgets, projecting $2 trillion in AI capital expenditures over the next three years. Furthermore, DeepSeek’s reliance on existing AI infrastructure suggests that it may not pose a fundamental threat to leading AI firms.
Microsoft Investigates DeepSeek’s Data Use
Adding to the controversy, Microsoft (NASDAQ:MSFT) is investigating whether DeepSeek accessed OpenAI’s proprietary data without authorization. According to Bloomberg, Microsoft researchers observed potential data extraction via OpenAI’s API (Economic Indicators API), raising concerns over intellectual property violations. If confirmed, this could lead to legal challenges that may impact DeepSeek’s credibility and operations.
Market Rebound and Earnings Outlook
Following Monday’s sharp decline, the market rebounded on Tuesday, with the S&P 500 gaining 0.9% and the Nasdaq Composite rising 2%. Nvidia led the recovery as analysts reassured investors that AI demand remains strong. Major tech firms, including Microsoft, Meta (NASDAQ:META), Apple (NASDAQ:AAPL), and Tesla (NASDAQ:TSLA), are set to report earnings this week, providing further insights into AI investment trends.
One-Sided Positioning Exacerbated the Sell-Off
Citi strategists attributed the steep sell-off to “one-sided positioning” in the S&P 500 and Nasdaq. As bullish sentiment reached extreme levels, the market became vulnerable to sharp corrections. Analysts warn that if the Nasdaq falls below 20,900, long positions could face significant losses. However, the broader AI investment thesis remains intact, with sector growth expected to continue despite short-term volatility.
ASML’s Strong Earnings Signal AI Strength
Meanwhile, ASML (AS:ASML), a key supplier of AI chip-making equipment, posted record net sales of €9.3 billion for Q4 2024, driving its stock up 11.1%. The surge in net bookings, particularly for extreme ultraviolet (EUV) systems, highlights sustained demand for semiconductor infrastructure—an essential component of AI expansion. These results further reinforce the argument that AI investment remains robust, despite market jitters.
Bottom Line: AI Remains a Long-Term Growth Story
While DeepSeek’s advancements showcase China’s growing AI capabilities, they do not fundamentally disrupt the AI investment landscape. Industry leaders continue to dominate AI infrastructure, with long-term spending trends remaining strong. The recent market volatility, though significant, appears to be a temporary reaction rather than a shift in AI’s growth trajectory. Investors should focus on the broader picture—AI’s role in the fourth industrial revolution is far from over.