Chinese startup Moonshot AI on Friday released Kimi K3, a new model the company says closes much of the performance gap with the leading U.S. AI systems.

The launch revived memories of last year's "DeepSeek moment," when another Chinese AI model briefly rattled Wall Street and triggered a sharp selloff across AI-related stocks.

The broader market was already trading lower, with the  (SPY) down 0.76% in pre-market trade, the  (DIA) slipping nearly 0.5%, and the Nasdaq-100 tracking  (QQQ) plummeting over 1.6%.

Companies with the most direct stake in that AI gap include Amazon (AMZN), Google (GOOG/GOOGL), and Meta (META). All of them build and sell their own frontier AI models, while Microsoft (MSFT) has poured billions into OpenAI and resells its models through Azure.

AMZN and GOOGL’s stock fell as much as 1.5% in pre-market trade, while META’s stock dropped 1.7% and MSFT’s stock was down as much as 1.8%. Alibaba (BABA), which has stake in Moonshot, fell more than 2%.

Why Investors Remember The 'DeepSeek Moment'

In its announcement, Moonshot said Kimi K3 still trails Anthropic's Claude Fable 5 and OpenAI's GPT 5.6 Sol, the current top-tier US models, on overall performance. However, it noted that K3 consistently beat every other model it tested, including Anthropic's Claude Opus 4.8 and OpenAI's GPT 5.5 on benchmarks covering coding and general agentic tasks.

Since the DeepSeek-triggered sell-off in January last year, U.S. hyperscalers have continued raising AI capital spending, easing fears that advances by lower-cost Chinese models would materially reduce demand for high-end computing infrastructure.

At the time, DeepSeek claimed that R1 matched OpenAI's o1 on several benchmarks, despite reportedly being developed at a fraction of the cost and without access to Nvidia's (NVDA) most advanced AI chips due to U.S. export restrictions. The announcement triggered one of the largest single-day market-value losses in Wall Street history.

Why Kimi K3 Matters For The AI Race

Bank of America (BofA) analysts told CNBC that K3 showed "pre-training scaling, paired with architectural innovation, can still deliver step-change gains for flagship Chinese models" even with persistent compute limits inside China.

"K3 raises the capability ceiling for China AI models, shifting the burden of proof to other independent AI labs," BofA wrote in a note to investors. It also flagged a subtler risk for Alibaba, stating that while the company benefits from the broader AI training and usage boom flowing through its cloud business, Qwen's positioning as the "open-source leader" among Chinese models may now face real competition from within China itself.

Semiconductor Stocks Extend Weekly Decline

Semiconductor stocks continued to trade lower in pre-market trade, extending the tech rout they’ve been stuck in over the past week. The iShares Semiconductor ETF (SOXX) is on track for its worst weekly performance in over a year. The drop follows Taiwan Semiconductor (TSM) hiking its 2026 capital expenditure guidance and announcing further U.S. investment plans earlier this week.

Shares of Nvidia (NVDA), Micron (MU), Broadcom (AVGO), and Qualcomm (QCOM) dropped more than 2% each in pre-market trade. Meanwhile, Advanced Micro Devices (AMD) stock, Intel (INC), and Marvell Technology (MRVL) fell over 3% each.