(Reuters)

The S&P 500 and the Nasdaq hit over one-week lows on Monday, as the surging popularity of a low-cost Chinese artificial intelligence model knocked shares of chipmaker Nvidia and other companies benefiting from investments into the technology.

Chinese startup DeepSeek has rolled out a free assistant it says uses cheaper chips and less data, seemingly challenging a widespread bet in financial markets that AI will drive demand along a supply chain from chipmakers to data centres.

DeepSeek’s AI Assistant on Monday overtook rival ChatGPT to become the top-rated free application available on Apple’s App Store in the United States.

Investors are likely to question whether DeepSeek’s developments have the potential to really disrupt the industry, said Adam Sarhan, CEO of 50 Park Investments.

“If it is something that can, then we have a situation where all these AI stocks and the market as a whole will be re-priced.”

Nvidia, whose chips are the top choice for powering AI applications, dropped 11.7%, while a gauge of semiconductor stocks dropped 6.5%.

Eight of the 11 S&P 500 sectors were in the red, with technology stocks leading declines with a 4.5% fall.

Microsoft, Meta Platforms and Google-parent Alphabet fell between 2.2% and 3.5%, while AI server makers Dell Technologies and Super Micro Computer slid 7.2% and 8.9%.

Power companies, which are expected to see a surge in demand from energy-intensive data centers needed to develop AI technology, also came under pressure. Vistra and GE Vernova were the worst hit, tumbling about 20% each.

The Cboe Volatility Index, known as Wall Street’s “fear gauge”, hit its highest since Dec. 20, last up 4.57 points at 19.42.

At 09:43 a.m. ET, the Dow Jones Industrial Average fell 125.18 points, or 0.28%, to 44,299.07, the S&P 500 lost 108.20 points, or 1.77%, to 5,993.04 and the Nasdaq Composite lost 606.43 points, or 3.04%, to 19,347.87.

Bucking the wider trend, AT&T rose 6.5% to an over three-year high after its fourth-quarter wireless subscriber growth surpassed expectations.

Big Tech will remain in focus, as Microsoft, Meta, Apple and Tesla – four out of the “Magnificent 7” companies that powered the bulk of last year’s gains – are set to report quarterly numbers later this week.

Global markets were also on edge as the U.S. and Colombia pulled back from the brink of a trade war on Sunday after the White House said the South American nation had agreed to accept military aircraft carrying deported migrants.

On the economic radar, the U.S. Federal Reserve is widely expected to hold its lending rate steady in its first interest-rate decision of the year due on Wednesday, while the December reading of the personal consumption expenditures (PCE) is scheduled for Friday.

Declining issues outnumbered advancers by a 1.13-to-1 ratio on the NYSE and by a 1.3-to-1 ratio on the Nasdaq.

The S&P 500 posted 16 new 52-week highs and no new lows while the Nasdaq Composite recorded 15 new highs and 40 new lows.