After experiencing a historic market cap loss of $595 billion-the largest single-day drop in stock market history-Nvidia's shares have shown signs of recovery. Yet, investors remain cautious as the chipmaker's brief rebound indicates a fragile market environment.
On Tuesday morning, Nvidia shares traded about 3% higher in the premarket session, recovering some of the ground lost in Monday's catastrophic sell-off. The stock initially surged much higher but started to falter as the market open neared. The downturn on Monday, which saw a 17% drop in Nvidia's stock price, had far-reaching effects across the broader tech sector, contributing to a 3% dip in the Nasdaq Composite.
The cause of Nvidia's sharp decline was the rise of DeepSeek, a Chinese AI startup that introduced a new open-source model capable of outperforming OpenAI's systems in certain tests. DeepSeek's model, known as R1, reportedly cost less than $6 million to develop, an extremely low price compared to the billions that major U.S. tech companies, including Nvidia, have poured into artificial intelligence. This revelation fueled fears that Nvidia's dominance in the AI chip market might be undermined, as cheaper alternatives could quickly disrupt the burgeoning industry.
Nvidia's response to the DeepSeek development was cautiously optimistic. A spokesperson acknowledged the significance of DeepSeek's work, describing it as an "excellent AI advancement." The company noted that the Chinese startup's model, leveraging widely available technology, was fully compliant with export control regulations. Nvidia's stance remains that while DeepSeek's innovation could prove valuable, it does not pose an immediate threat to the core AI hardware market led by Nvidia.
Despite Monday's market turmoil, Wall Street analysts have largely maintained their support for Nvidia. None have downgraded the stock, with some viewing the developments as positive for the AI sector in the long run. Barclays analyst Raimo Lenschow noted that advancements like DeepSeek's could facilitate more widespread adoption of generative AI technologies. He wrote, "More powerful LLM models that can run at a fraction of the original cost estimates will mean that genAI adoption should come easier and hence, faster and broader across the software universe."
However, there is a sense of caution in the air. Morgan Stanley's Joseph Moore, while maintaining an overweight rating on Nvidia, reduced his price target from $166 to $152, citing concerns over potential deflationary pressures from innovations like DeepSeek's model. Moore emphasized that the stock market's reaction to these changes could have lasting consequences, potentially leading to more stringent export controls or reduced spending enthusiasm from tech companies.
Global Tech Stocks Show Signs of Stabilization
As Nvidia led the way, other tech stocks began to show signs of recovery following Monday's sharp declines. On Tuesday, Nvidia was not alone in its modest rebound. Oracle and Marvell Technology saw their shares rise by 3.4% and 3.6%, respectively. In Europe, semiconductor firms like ASML and Infineon managed to pare down earlier losses, providing a sense of stability in an otherwise volatile market.
The fear sparked by DeepSeek's breakthrough has not been confined to U.S. markets. Global tech stocks have suffered, with the ripple effects reaching markets in Tokyo, Amsterdam, and Silicon Valley. The sell-off was so intense that retail investors were prompted to act. According to Vanda Research, retail investors snapped up a record $562.2 million in Nvidia stock during Monday's dip, demonstrating their belief in the company's long-term prospects despite the immediate turbulence.
Marc Halperin, co-head of European equities at Edmond de Rothschild, noted that it remains unclear whether the market's retreat is merely a short-term correction or a sign of deeper shifts in sentiment. "If we do see a market correction, it could unfold quickly and with significant consequences," Halperin warned, emphasizing the high risks for retail investors who have heavily invested in tech stocks.
Valuation Risks and High Expectations in the AI Boom
The steep declines across tech stocks also highlight the increasing concentration of capital in a few high-priced stocks, with Nvidia leading the charge. Before Monday's drop, Nvidia was trading at nearly 60 times its earnings, a stark contrast to the broader market, where the S&P 500's average P/E ratio stands at 22. This disparity reflects how inflated valuations have become, driven largely by the AI boom ignited by products like ChatGPT.
David Bahnsen, chief investment officer at The Bahnsen Group, cautioned that the tech sector's performance is at risk due to high valuations. "The excessive weighting these tech stocks have in many investor portfolios and the high concentration these tech stocks have in the market indices was a significant and under-appreciated risk issue," he said.
Investors' heavy reliance on leveraged positions in tech stocks has also exacerbated the downturn. Rob Almeida, a global investment strategist at MFS International, pointed out that algorithmic trading models and the unwinding of leverage may have amplified Monday's sell-off. "When you get days like this, what might be exacerbating it is leverage that might be being unwound and isn't being accounted for," Almeida explained. The combination of high valuations, heavy investor reliance on tech stocks, and algorithmic trading has made the market particularly vulnerable to rapid sell-offs.
