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By Sinéad Carew, Medha Singh and Amanda Cooper
NEW YORK/BENGALURU/LONDON (Reuters) -Semiconductor stocks were a mixed bag on Wednesday, with European chip stocks rallying on strong earnings while U.S. stocks including Nvidia fell as investors continued to assess the potential threat from China's low-cost DeepSeek artificial intelligence tool.
On Wall Street, the Philadelphia semiconductor index struggled for direction but was last down 0.4%. The broader S&P 500 tech index fell 1.9%, with a big drag from AI chip leader Nvidia which was down more than 6%.
Nvidia rose 8.9% on Tuesday following a 17% fall on Monday, a record one-day market value loss, after DeepSeek's AI tools emerged as challengers to incumbents such as OpenAI's ChatGPT, while signalling that development costs may sink.
DeepSeek launched a free AI assistant last week that overtook OpenAI's ChatGPT downloads on Apple's App Store, while the cost and performance of its tools upended industry beliefs that China was years behind U.S. rivals in the AI race.
Two days after Monday's sell-off, investors were still trying to figure out how they should react to the challenge from DeepSeek, said Jack Ablin, Chief Investment Officer and Founding Partner at Cresset Capital in Chicago.
"The market for tech stocks is in this middle ground between investors taking DeepSeek seriously and believing it's very negative news for arguably expensive stocks like Nvidia, and investors who are going to shrug off DeepSeek and believe that the AI initiative will continue as they had expected," he said.
"It seems like there's a sea change happening and investors are trying to figure out what side of the argument they are on."
U.S. investors are also focused on the U.S. Federal Reserve's two-day policy meeting due to end later on Wednesday and earnings this week from several of the so-called Magnificent Seven megacaps.
Quarterly results from Microsoft and Meta, due after the closing bell, will be closely monitored for details on AI spending plans.
"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 (the) 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."
Some experts expressed scepticism over DeepSeek's success story, especially the lack of details related to the startup's spending budget.
Separately, OpenAI and one of its backers Microsoft were probing whether data output from the ChatGPT maker's technology was improperly used by a group linked to DeepSeek, Bloomberg News reported on Tuesday.
EUROPEAN BOOST
European tech stocks jumped on Wednesday, partly fuelled by a nearly 5.6% gain in ASML after the Dutch semiconductor equipment maker reported a surprisingly large rise in new bookings.
An index of European tech stocks finished up 2.4%, with a 2% gain in BE Semiconductor shares and a 3.2% gain in shares of ASM International.
U.S. chip stocks were a mixed bunch with several joining Nvidia in the red. Cirrus Logic was down 2.2% while ARM Holdings' U.S. shares fell 2.1% and Broadcom lost 1.8%.
On the other side of the fence Coherent Corp was up 3.6% and Advanced Micro Devices rose 2.6%. ASML's U.S. shares were last up 4.4%.
(Reporting by Sinead Carew in New York, Medha Singh in Bengaluru, Amanda Cooper and Harry Robertson in London, Danilo Masoni in Milan; Editing by Louise Heavens, Shinjini Ganguli, Shounak Dasgupta, Arun Koyyur and Nia Williams)
