Weekend Update #215
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Panic and fear took hold of markets this week as investors contemplated the implications of China-based DeepSeek’s new R1 large language model. The Nasdaq 100 lost $1 trillion in valuation as a result on Monday while the Philadelphia Semiconductor (SOX) Index fell the most since March 2020. DeepSeek reported 90-95% lower costs for comparable reasoning tasks to leading models from OpenAI, Anthropic, Google, xAI, and Meta, which created worry over if the trajectory for spending on AI priced into the market has been overdone. Throughout the tech-heavy earnings week, company commentary and probes into whether DeepSeek misreported artificially low costs or infringed on OpenAI intellectual property all helped ease fears over a worst-case scenario.
News on fiscal policy measures from President Trump was closely followed this week. On Friday, the president’s announcement that the U.S. would impose 25% tariffs on Canada and Mexico and 10% tariffs on China on February 1st. Mixed messaging from various sources around the tariffs caused some confusion in the market, but to end the week, the White House has confirmed the deadline and hard stance on trade. Key confirmation hearings for President Trump’s nominees were also key events this week with RFK Jr. for Health Secretary, Howard Lutnick for Commerce Secretary, and Tulsi Gabbard for Director of National Intelligence.
The FOMC delivered their first interest rate decision of the year on Wednesday, voting unanimously to hold the federal funds rate constant at 4.25% to 4.50%. Initially markets traded lower on the announcement as the committee’s statement release wording changes leaned hawkish. However, Federal Reserve Chairman Jerome Powell delivered more balanced and confident remarks during his press conference to reassure markets. The main message is that the Fed needs more time to see progress made on inflation and also awaits analysis of key inflation risks, such as the implementation of tariffs. Underlying economic trends remain strong and the Federal Reserve still perceives the current policy to be above the neutral rate, or restrictive, so the market is in a wait-and-see mode as incoming data evolves.
In economic data for the week, new home sales surpassed estimates in December at 698,000. Consumer Confidence fell for the second month in January as consumers grew more pessimistic on the labor market and contemplated potential economic impacts of tariffs. The first reading of Q4 2024 GDP showed lower-than-expected growth, rising at an annualized 2.3% QoQ vs. the 2.6% estimate. Core PCE prices in Q4 2024 rose in line with consensus estimates at an annualized 2.5% QoQ, and personal consumption rose 4.2% QoQ, beating the 3.2% consensus estimate.
Key companies that reported earnings this week included META, MSFT, TSLA, AAPL, ASML, NOW, CAT, and UPS. Investor reactions were mixed but capitalization on AI opportunities for tech players was celebrated while investors are keenly aware of risks to key narratives that have been supporting a relatively richly valued market relative to history.
Friday’s Close (Weekly Performance)
S&P 500 6,040.53 (-1.00%)
Nasdaq 19,627.44 (-1.64%)
Dow Jones 44,544.66 (+0.27%)
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