The semiconductor market experienced its most severe shock after the release of the Chinese artificial intelligence model Kimi K3 by Moonshot AI on July 16. With 2.8 trillion parameters, this open-source model became the largest at launch, triggering a massive sell-off of chipmaker and AI company stocks worldwide.
On Friday, the decline was particularly pronounced in Asia: Taiwan's TWII index lost over 6%, while Japan's Nikkei 225 closed down 4%. In the U.S., the Nasdaq fell 1.5%, marking its worst session of the week. Shares of Chinese developer Z.ai in Hong Kong plummeted nearly 30%, and Nvidia briefly ceded its title as the world's most valuable company to Apple.
Investors have already dubbed this the "DeepSeek 2.0 effect." For context, in January 2025, the launch of DeepSeek's R1 model led to Nvidia losing approximately $590 billion in market capitalization in a single session. Now, the market is replaying that scenario, but with new variables.
Why did Kimi K3 scare the market so much?
Kimi K3 scored 57 points in the independent Artificial Analysis Intelligence Index, surpassing Claude Opus 4.8 and GPT-5.5. This figure nearly matched Claude Fable 5 and GPT-5.6 Sol. The key point: in certain tests, the model outperforms competitors at a fraction of the cost. The model supports a context of 1 million tokens, handles text and images, and its full weights will be available on July 27 under a Modified MIT license—meaning free for small labs.
Wall Street analysts, however, see this not as a shock but as a pattern. At Morgan Stanley, the release was described as the result of steady progress, while analyst Gary Yu noted that Chinese LLMs are comprehensively catching up to U.S. leaders in size, performance, and price. At Bernstein, they believe China will continue to reclaim market share.
Yet some experts are convinced the sell-off is excessive. According to their data, the price of K3 is close to that of GPT-5.6, not radically lower. The panic likely reflects the overall nervousness of a market that has been under pressure for several weeks due to concerns over inflated valuations of companies tied to AI infrastructure.
The Philadelphia Semiconductor Index has fallen more than 20% from its late-June record, entering a formal "bear market." The VanEck Semiconductor ETF broke through a key moving average as early as July. The release of Kimi K3 only accelerated this decline. It also affected cryptocurrencies: Bitcoin dropped below $64,000.
My comment: The market is clearly overheated, and any successful launch from China is perceived as a threat to the dominance of Western giants. But it's too early to talk about a change in leadership—Kimi K3 only confirms that the AI race is becoming increasingly competitive, and investors should prepare for new volatility.