US stocks faced a significant downturn on Monday morning after the Chinese AI startup DeepSeek revealed a new AI model, R1, which rivals those from major US tech companies but at a fraction of the cost. DeepSeek's achievement, using just $5.6 million compared to the hundreds of millions spent by US firms, caused a stir in the tech sector. This development raised concerns about the dominance of US tech companies in AI and their heavy investments, with stocks of major companies like Nvidia, Meta, and Alphabet experiencing notable declines.

DeepSeek's breakthrough is particularly striking given US efforts to limit China's access to high-power AI chips. The broader stock market suffered as well due to the significant weighting of tech stocks in the S&P 500. Analysts suggest that this event has led investors to reassess the US lead in AI and their spending strategies. This week marks the start of tech companies reporting earnings, which could further influence market dynamics. However, some analysts believe the selloff might be exaggerated, with doubts about a substantial shift to a Chinese startup despite DeepSeek's impressive achievement. Investors might have used this news as an opportunity to pull back gains during the anticipation of policy shifts related to the upcoming US administration changes.