By Medha Singh, Amanda Cooper and Harry Robertson
LONDON/MILAN (Reuters) - Chip stocks in the U.S. and Europe rose on Wednesday for a second straight day, recovering from a punishing selloff triggered by China's low-cost DeepSeek artificial intelligence tool at the start of the week.
Shares of AI chip leader Nvidia, however, slipped 2.7% to $125.44 and weighed on the Nasdaq. The stock ended 8.9% higher on Tuesday, but was well below Friday's close of $142.62 and record high of $153.13 on Jan. 7.
European tech stocks jumped, partly fuelled by a nearly 8% surge in ASML after the Dutch semiconductor equipment maker reported a surprisingly large rise in new bookings.
An index of European tech stocks surged 3.2%, powered by ASML, while chipmakers BE Semiconductor and ASM International added 3.5% and 5.4%, respectively.
Gains were more modest in U.S. peers such as Applied Materials, Lam Research and KLA Corp which rose between 0.9% and 2%. The Philadelphia chip index edged up 0.1%.
The emergence of DeepSeek's AI tools as possible challengers to incumbents such as OpenAI's ChatGPT, while also signalling that development costs may be dropping rapidly, battered AI-linked stocks on Monday and wiped nearly $1 trillion off the market value of semiconductors, power and equipment companies.
The selloff was focused on Nvidia, which lost almost $600 billion in market value - the largest single-day drop for any company on record.
"We remain of the view that the DeepSeek story is part of the evolution of the AI cycle ... with certain sectors (chipmakers and energy) likely to remain under pressure but rest of the sectors to shake off any Monday sell-off and move higher," said Jefferies Chief Economist Mohit Kumar.
"Valuations are still stretched for certain tech companies and the coming earnings season will need to justify the current high valuations."
EARNINGS TEST
DeepSeek launched a free AI assistant last week that overtook OpenAI's ChatGPT on Apple's App Store in the U.S., and the cost and performance of its AI tools seemed to upend the industry belief that China was years behind its U.S. rivals in the AI race.
By Wednesday, there was a greater sense of calm in markets as investor focus shifted to the outcome of the U.S. Federal Reserve's two-day policy meeting and earnings this week from several of the so-called Magnificent Seven megacaps.
Quarterly results from Microsoft and Meta after the closing bell will be closely monitored for details on AI spending.
"This is the new line in the sand for the AI enablers and the megacap growth cohort in general," said Scott Chronert, U.S. equity strategist at Citi.
"Their ability to continue to drive positive absolute and relative returns will probably come down to investor confidence that ongoing positive revisions are forthcoming."
However, some experts expressed scepticism over DeepSeek's success story, especially the lack of details related to the startup's spending budget.
Separately, Microsoft and OpenAI are probing if data output from the ChatGPT maker's technology was improperly used by a group linked to DeepSeek, Bloomberg News reported on Tuesday.
(Additional reporting by Danilo Masoni in Milan and Medha Singh in Bengaluru; Editing by Louise Heavens, Shinjini Ganguli, Shounak Dasgupta and Arun Koyyur)
