Nasdaq, S&P 500 drop 1% after China’s latest AI breakthrough rattles tech stocks

Global markets faced a sharp sell-off on Friday as investors reacted to news from the artificial intelligence sector in China. Moonshot AI introduced a new open-source model called Kimi K3, claiming it performs at a level competitive with top models from American firms like OpenAI and Anthropic. This development sparked significant concern among investors who worry that open-source alternatives could undermine the business models of US tech companies.

The Nasdaq index fell 1.4 percent while the S&P 500 dropped 1 percent. The semiconductor industry was hit particularly hard, with a major chip index slipping into a technical bear market. This decline follows a period of rapid growth that saw chipmakers reach record valuations. Micron shares specifically have retreated 30 percent from their June peaks. Analysts suggest that the market was already prone to volatility after a long period of aggressive gains.

Beyond the tech sector, rising oil prices contributed to the downward pressure on stocks. Brent crude and West Texas Intermediate futures both saw their largest weekly gains in months following reports of conflict in Iran. The increase in oil prices has reignited concerns about inflation just days after positive consumer data provided some optimism for investors.

While some market participants view the entry of Kimi K3 as a disruption to the AI spending narrative, others suggest that the sector remains resilient. Wells Fargo noted that while the tech rally moved fast, the long-term outlook for American AI earnings remains intact. Market rotation is currently underway, with investors moving capital out of technology and into sectors like financials as they balance the impact of global geopolitical risks and the shift in competitive landscapes.