The next DeepSeek? A surprise AI breakthrough in China is rattling US market heavyweights.

CN-STR / AFP via Getty ImagesA new Chinese AI model is rattling the US stock market. Kimi K3 rivals advanced models in the US, sparking fears of disruption to domestic AI trades. The Philadelphia Semiconductor Index is approaching a bear market, having fallen nearly 20% from its peak.Kimi K3 is giving the US AI bulls anxiety. The new AI model built by Chinese startup Moonshot is the latest headwind pushing against the US AI trade in recent weeks. Kimi K3 is said to rival some of the most advanced AI models built by OpenAI and Anthropic, despite using fewer advanced AI chips. If that sounds familiar, it's a strong parallel to DeepSeek, the Chinese AI model that upended at the beginning of 2025. Selling picked up steam in the chip sector on Friday as investors digested the news along with ongoing concerns about whether tech giants have been spending too much on AI hardware and what a pullback in capex could mean for the wider ecosystem. The Philadelphia Semiconductor Index fell 4% on Friday. The index, which just logged its best-ever first half of the year, is down 19% from its recent peak, nearing the threshold for a technical bear market.Here were some of the biggest moves in the tech sector on Friday:Samsung: -9%Taiwan Semiconductor Manufacturing: -3%Intel: -3%AMD: -2%Nvidia: -2%The release of Kimi K3 is sparking fears of a "DeepSeek 2.0," JPMorgan strategists wrote, referring to the $1 trillion rout in tech stocks last year as investors fretted over the open source model that was reportedly built with cheaper hardware."Whatever gap existed between American and Chinese frontier AI just got a lot smaller, and it happened on the exact morning Wall Street was busy convincing itself AI economics don't add up," Mark Malek, the CIO of Siebert Financial, wrote about the market's reaction on Friday."While the broader rotation out of AI CapEx receivers has been underway for several weeks, today's move was likely catalyzed by Chinese AI startup Moonshot releasing its new open-weight model, Kimi K3," Kent Fung, the vice president of market intelligence at Fundstrat, wrote in a note.All three major indexes were dragged into the red as the sell-off rocked global stocks. The tech-heavy Nasdaq 100 tumbled nearly 2%.Here's where US indexes stood around 11:30 a.m. ET on Friday:S&P 500: 7,474.66, down 0.78% Dow Jones Industrial Average: 52,468.19, down 0.16% (-84.78 points)Nasdaq 100: 28,597.87, down 1.47%US-listed ADRs of Taiwan Semiconductor Manufacturing dropped another 3% early Friday despite the firm posting a beat and raise for the second quarter, a sign that the market is preoccupied with AI capex and whether the money being invested in AI will generate a solid return, according to JJ Kinahan, the senior vice president at Cboe Global Markets.TSMC, which is the world's largest manufacturer of microchips, appears to have triggered investors' anxieties with its comment that it was raising its global capital budget by 14% to $64 billion, Kinahan added."That appears to have investors again worried about the potential returns with such massive spending," he said on Friday.The market is questioning how long the current pace of growth can continue in the tech sector, David Morrison, a senior market analyst at Trade Nation, wrote in a note."The question now is whether this will become yet another 'buy the dip' opportunity, or if the pace of selling accelerates as everyone rushes to the exit doors at the same time," he said.Worries are also flaring that the sell-off has more room to run. Despite heavy selling in recent weeks, semiconductor stocks still haven't hit technical levels that would imply a rebound is around the corner, analysts at Jefferies wrote in a note Friday morning."Even with all of the Semis and HW destruction, it's very interesting that the % of Semis + HW stocks screening oversold is not even close to where you would see some sort of exhaustion level," the firm said.Both the VanEck Semiconductor ETF and the Philadelphia Semiconductor Index have fallen below their 50-day moving averages, a sign that momentum is starting to break down, Luke Lango, a tech analyst, wrote in a note on Friday."The technicals are deteriorating and demand honest acknowledgment," Lango said. "Continued meaningful weakness from here must be respected."The risk-off sentiment concentrated in the tech sector has added to the ongoing headwind of the Iran war, particularly since the ceasefire with Iran has broken down, top economist David Rosenberg said.The US military said it completed its sixth round of strikes against Iran Thursday evening. Iran, meanwhile, said it attacked US military forces in Syria and Bahrain on Friday. Iran also attacked a power and water plant, Kuwait said, adding to the infrastructure damage in the Middle East that has led markets to fear higher energy prices and hotter inflation."We end the week with risk-on morphing into risk-off," Rosenberg said, referring to the strength stocks showed earlier in the week.Read

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