A budding recovery in tech stocks hit a snag on Tuesday, with AI chip giant Nvidia struggling to bounce back from a historic loss triggered by a budget-friendly Chinese AI model that poses a threat to U.S. competitors.

In the previous session, Nvidia saw a staggering $593 billion wiped off its market value, marking the largest single-day loss for any company ever. Meanwhile, shares of semiconductor, power, and infrastructure firms tied to AI collectively dropped over $1 trillion.

On Tuesday, Nvidia's shares climbed 2% in a volatile trading environment, but that was still far from the more than 5% gains seen in premarket trading. Other AI-related stocks had mixed results, with Oracle up 1.4% and Micron down 1.3%. Tech stocks in Europe also started to decline as the day went on.

The selloff on Monday was sparked by the launch of a free AI assistant from Chinese startup DeepSeek, which claimed its models require less data and come at a fraction of the cost of existing services.

Despite some skepticism about DeepSeek's pricing claims, OpenAI CEO Sam Altman praised it as an "impressive model," while former U.S. President Donald Trump referred to it as "a wakeup call for our industries."

Altman, who leads the AI company behind ChatGPT, expressed on social media that they would undoubtedly produce superior models and welcomed the new competition as invigorating.

DeepSeek's sudden emergence in the AI landscape has shifted the narrative, suggesting that China is catching up to its larger U.S. counterparts.

Investors reacted by selling off tech stocks across the globe, with the impact felt from Tokyo to Amsterdam to Silicon Valley.

"We don't know how much of returns we're going to get off these AI investments. Everybody's second guessing what we have been doing for the last 18 months to two years, which is buying indiscriminately" into AI stocks, said Kim Forrest, chief investment officer at Bokeh Capital Partners

"The Street is bullish in the long run, but in the short- to medium-term, things are uncertain."

In Europe, shares of Dutch semiconductor firm ASML fell by 0.5%, and Infineon dropped 0.6%. Meanwhile, German software company SAP saw a 0.3% decline after releasing its quarterly results.

Over in the U.S., the Philadelphia semiconductor index slipped by 0.1%, just a day after experiencing its biggest one-day percentage drop since March 2020.

NO ROOM FOR MISTAKES

This selloff highlights how much investor money is tied up in a handful of stocks that are trading at a significant premium compared to the broader market.

Before Monday's downturn, Nvidia's shares were valued at nearly 60 times its earnings, while the entire S&P 500 averaged 22 times, based on LSEG data.

The excitement around AI has led to a massive influx of capital into stocks, boosting the market value of the "Magnificent Seven" companies by about $10 trillion since the AI boom began with ChatGPT in November 2022.

However, Nvidia's valuation multiple has dropped to its lowest in a year at 26.76, which caught the attention of retail investors.

According to data from Vanda Research, retail investors seized the opportunity during Nvidia's selloff, purchasing a record net of $562.2 million in the company's stock on Monday. J.P. Morgan data revealed that buy orders from retail investors outnumbered sell orders by a 2:1 ratio on that day.

"It's a very emotional reaction to something that we don't have the full story on. Investors are going to tiptoe back in and start to nibble at some of these oversold semiconductor stocks," said Art Hogan, chief market strategist at B. Riley Wealth.

INVESTORS IN ACTION

Investors have taken on significant debt to snag those high-priced tech stocks.

The selloff on Monday likely pushed many to offload other assets to cover their losses, and with a surge in algorithmic trading, those reactions probably intensified, according to Rob Almeida, a global investment strategist and portfolio manager at MFS International.

"When you get days like this, behind the scenes, what might be exacerbating it is leverage that might be being unwound and isn't being accounted for," he said.

"So you combine all of these things, companies over-earning, maybe the AI supply chain being too full, valuations really expensive, huge leverage built up in the system and too many robots selling at the same time, and it all becomes obvious after the fact."

Several major tech players, like Apple and Microsoft, are set to announce their earnings later this week, and their leaders will likely want to tackle any worries about spending on capital.