Advancements in the AI industry sent shockwaves through equity markets. However, despite the turbulence, markets recovered from their pull back in December as we saw broad positive performance across all major asset classes to close out January. Strong earnings from major tech companies, the announcement of significant AI infrastructure investments and moderate inflation data appear to have fueled investor optimism.
“This development sent shockwaves through the market, especially impacting Nvidia (NVDA), whose stock plummeted nearly 17% due to fears that DeepSeek could lessen the demand for Nvidia’s high-end AI chips.”
The Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred measure of inflation, indicated continued stability. Year-over-year, Headline PCE edged up only slightly from 2.45% to 2.55%, while Core PCE, which excludes volatile food and energy prices, saw a modest decline from 2.82% to 2.79%. A closer look at the three-month annualized Core PCE, which provides a more recent trend in prices, showed a reading of 2.17%, suggesting inflation remains on a gradual downward trajectory.
The tech market initially saw an uptick following the announcement of the Stargate Project by President Trump—a $500 billion initiative aimed at enhancing AI infrastructure in partnership with tech leaders like OpenAI, Oracle, and SoftBank. This news sparked optimism about the future of AI in the U.S., driving early gains in tech stocks as investors anticipated the economic and technological benefits of such a massive investment. However, the broader market reaction remained mixed as investors weighed other key developments, particularly the release of DeepSeek.
DeepSeek, an AI application from a Chinese startup, was launched shortly thereafter, claiming to match or even surpass the performance of leading AI models like those from OpenAI but at a fraction of the cost and computational resources. This development sent shockwaves through the market, especially impacting Nvidia (NVDA), whose stock plummeted nearly 17% due to fears that DeepSeek could lessen the demand for Nvidia’s high-end AI chips. The tech sector at large experienced a sizeable sell-off, with the Nasdaq index dropping by about 3% as the market grappled with the implications of DeepSeek’s efficiency and open-source model.[1]
While the Stargate Project reinforced U.S. commitment to AI leadership, DeepSeek’s emergence highlighted a potential shift in AI development paradigms, emphasizing cost-effectiveness and accessibility. This combination of events led to a nuanced market response—enthusiasm for domestic AI investment was counterbalanced by concerns over intensifying global competition and evolving technological trends.
Corporate earnings also played a crucial role in shaping market sentiment. As the month ended, several major companies reported stronger-than-expected earnings, with Apple (AAPL), Meta (META), and Visa (V) exceeding analyst estimates. This provided a stabilizing force for markets, as investors looked beyond short-term volatility toward corporate profitability.
Overall, the broader market demonstrated resilience, with the S&P 500 Index rising 2.8% in January. Notably, ten out of eleven sectors posted positive returns, underscoring widespread investor confidence after December’s weakness. The market’s strength was not limited to tech, as other sectors, including financials, industrials, and energy, posted solid gains. However, January’s broad positive performance was not without volatility. Markets initially reacted negatively to newly imposed tariffs, which fueled uncertainty over global trade and corporate margins. This weighed on sentiment, particularly in sectors with significant international exposure, as investors reassessed growth prospects.
Meanwhile, the Federal Reserve held interest rates steady as expected but struck a cautious tone on inflation. The removal of language acknowledging prior progress on inflation introduced some uncertainty regarding the timing of future rate cuts, leading to speculation about how long the Fed might maintain its restrictive policy stance.[2]
Ultimately, January ended on a stable and positive note, as strong corporate earnings and manageable inflation data helped offset concerns surrounding AI competition, tariffs, and Federal Reserve policy uncertainty, leading to a resilient broader market performance. Investors will now look ahead to key economic data releases and corporate guidance for signs of whether the positive momentum can be sustained into February.
[1] https://www.weforum.org/stories/2025/02/open-source-ai-innovation-deepseek/
[2] https://www.federalreserve.gov/newsevents/pressreleases/monetary20250129a.htm
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Your Smarter Way Portfolio Management Team
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