AE Wealth Management: Weekly Market Insights | 1/26/25 – 2/1/25
Weekly Market Commentary
THE WEEK IN REVIEW: Jan. 26 – Feb. 1, 2025
DeepSeek and China rattle markets
The AI narrative suffered a bit of a shock last week, but markets recovered as the week progressed. What was all the hubbub about? A one-year-old start-up Chinese company most of us have never heard of, DeepSeek, launched an artificial intelligence (AI) app featuring a fully functioning large language model (LLM) that performs on par with the latest AI models. Not shocking so far — but here’s the truly mind-boggling part: DeepSeek claims they built their AI model for only $5.6 million, while U.S. counterparts have reportedly spent hundreds of millions or even billions of dollars. That’s 20 to 200 times less.1
It’s like finding out you paid $100,000 for a car when you could get it for $500. All this money fueling the AI hype, all the data centers we’ll need to build and all the power plants to run them, the dazzling rise of Nvidia and the widespread belief China was years behind in AI development — markets didn’t like the implications of the news.2 Despite the U.S. government’s export controls on AI chips to China, DeepSeek trained its AI program on older-generation chips, using a small fraction of the computing power and electricity we use.3
While everyone assumed AI’s future lay in faster, better chips (where the only reach choice is Nvidia and no one else), this pesky company has seemingly achieved with a pittance what American companies need piles of cash and mountains of the latest chips to do. How could the professionals have gotten it so wrong?
On the flip side, what if this is a mirage and just another piece of junk? As usual, the explanation lies somewhere in between — and the markets finally seemed to figure that out. China is known for taking intellectual property (IP) and mimicking nearly everything someone else creates, from technology to pharmaceuticals. The odds of DeepSeek developing what it did without help from the Chinese government and the pipeline of likely stolen IP are pretty low. But even if they did, panic isn’t the appropriate response. The odds are this was an elaborate scheme by the Chinese coming on the heels of the major AI venture announced last week.
This is a golden opportunity to lower our heads and run harder to avoid being overtaken by the Chinese. Several comments were made last week referring to DeepSeek being the newest version of America’s “Sputnik” moment, when the Russians launched the first Earth-orbiting satellite in 1957 and caught us unprepared and feeling vulnerable.4 We took that as a serious threat and challenge and went on to win the space race. We need to do that with AI because the consequences would be enormous. Some companies like Meta are taking it seriously, but we will likely need more to join the fight.5
Fed says relax, don’t be in such a hurry
The Federal Reserve left interest rates unchanged last week in its first meeting of 2025.6 In a widely expected decision, the Fed signaled it would hit the pause button on recent interest cuts, entering a new wait-and-see phase as it tries to determine whether to lower rates again and how much more it would cut.
The decision on Wednesday to leave the benchmark federal funds rate at its current level of 4.25%-4.55% followed three consecutive rate cuts beginning in September and running through the final meeting of 2024.7 The door is still open, potentially, for a March cut of 25 basis points (0.25%), with current forecasts placing an approximately 18% chance of a March cut.8
Fed Chair Jerome Powell’s demeanor during the post-meeting press conference was calm and even, soothing markets and helping avoid the dreaded press conference sell-off.9 After the meeting concluded, the Fed’s announcement noted unemployment “has stabilized at a low level” and “inflation remains somewhat elevated,” notably removing a reference from prior rates announcements of inflation making progress toward the 2% target. The removal upset markets, which felt the odds of additional rate cuts would be even dimmer this year. Chairman Powell was able to calm markets’ fears that the Fed was turning more hawkish, and early market losses were pared as we closed on Wednesday.
Markets rebounded on Thursday when the first reading of fourth-quarter gross domestic product (GDP) came in at +2.3%, below expectations of +2.6%.10 Then we closed the week with an announcement on Friday that tariffs against Canada, Mexico and China would commence on Feb. 1 — and markets turned sharply downward toward the end of the trading day (more below).
Despite all this, markets ended January with positive returns. We’ll have to see how things play out with the Fed and tariffs; right now, Powell is resisting calls from President Trump to “lower rates immediately” (which would potentially lock in 2.5%-3% inflation or maybe even accelerate it) and is staying the course against inflation. Slower economic growth will not help stiffen Powell’s stance, and we’ll have to see if the jobs market remains solid when the December jobs report drops this coming Friday. If jobs soften, the Fed may not have much of a choice, as the White House will probably apply relentless pressure for it to move on rates.
Time for tariffs
On Friday, the Trump administration announced it would be levying tariffs against Canada (25%), Mexico (25%) and China (10%) starting on Saturday, Feb. 1.11 How long the tariffs remain in effect is up in the air. These tariffs are likely going to be used as leverage to get these three countries to commit to concessions the administration wants regarding the border and fentanyl smuggling, among other things.
The White House has declared these tariffs will not be inflationary, while others disagree. It’s too early to tell who will be right. The markets’ knee-jerk reaction was to run for cover ahead of the weekend, but as with the DeepSeek news, what will happen with inflation will probably end up somewhere in the middle. This situation is fast-moving and needs to be monitored, so stay alert and informed of the developments.
Coming this week
- Now that the first Fed meeting of the year is over, we will get members of the Fed speaking. There are currently three scheduled to speak this week, with more likely to be announced to speak in the coming days.
- We will get lots of jobs data this week, with the Job Openings and Labor Turnover Survey (JOLTS) report for December kicking things off on Tuesday. We’ll see the ADP employment report on Wednesday, then the weekly jobless claims number on Thursday. Finally, the latest Bureau of Labor Statistics (BLS) nonfarm payroll report will come out on Friday. We’ll also get the latest unemployment rate, which stood at 4.1% on the last report.
- Other data this week includes construction spending, auto sales and manufacturing readings (Monday); factory orders (Tuesday); MBA mortgage applications, the trade deficit and services data (Wednesday); productivity (Thursday); and wages, wholesale inventories, consumer credit and consumer sentiment (Friday).
- Earnings roll on this week with 36% of S&P 500 companies reporting results. As of Jan. 24, 77% of companies have reported positive earnings per share (EPS) and 63% reported positive revenue.12 Earnings growth for the S&P 500 in the fourth quarter is 13.2%, marking the highest year-over-year earnings growth rate for the index since the fourth quarter of 2021. So far, 12 companies have issued negative EPS guidance, while guidance has been positive for 13 companies. Valuation is still rich for the S&P 500, with the forward 12-month price-to-earnings (P/E) ratio at 22.0 versus the five-year average (19.8) and the 10-year average (18.2).
Index Performance Returns % | |||||
| 1 WK | YTD | 1YR | 3YRS | 5YRS | |
| S&P 500 | -1.00% | 2.70% | 24.66% | 10.18% | 13.37% |
| NASDAQ | -1.64% | 1.64% | 29.43% | 11.29% | 16.49% |
| DJIA | 0.27% | 4.70% | 16.76% | 8.23% | 9.53% |
Interest Rates: | |||||
| 1/31/2025 | 1/24/2024 | ||||
| UST 10 YR Government Bond Yield | 4.54% | 4.62% | |||
| Germany 10 YR | 2.48% | 2.58% | |||
| Japan 10 YR | 1.25% | 1.23% | |||
| 30 YR Mortgage | 6.96% | 7.01% | |||
| Oil | $73.81/ppb | $74.61/ppb | |||
| Regular Gas | $3.10/ppg | $3.12/ppg | |||
| All data as of Jan. 31, 2025 | |||||
Sources:
1 Ryan Browne and Dylan Butts. CNBC. Jan. 30, 2025. “DeepSeek’s AI claims have shaken the world — but not everyone’s convinced.” https://www.cnbc.com/2025/01/30/chinas-deepseek-has-some-big-ai-claims-not-all-experts-are-convinced-.html. Accessed Feb. 2, 2025.
2 Nvidia. “Stock Quote & Chart.” https://investor.nvidia.com/stock-info/stock-quote-and-chart/default.aspx. Accessed Feb. 2, 2025.
3 John Villasenor. Brookings. Jan. 29, 2025. “DeepSeek shows the limits of US export controls on AI chips.” https://www.brookings.edu/articles/deepseek-shows-the-limits-of-us-export-controls-on-ai-chips/. Accessed Feb. 2, 2025.
4 John Ruwitch. NPR. Jan. 28, 2025. “DeepSeek: Did a little known Chinese startup cause a ‘Sputnik moment’ for AI?” https://www.npr.org/2025/01/28/g-s1-45061/deepseek-did-a-little-known-chinese-startup-cause-a-sputnik-moment-for-ai. Accessed Feb. 2, 2025.
5 Marco Quiroz-Gutierrez. Fortune. Jan. 27, 2025. “Meta is reportedly scrambling ‘war rooms’ of engineers to figure out how DeepSeek’s AI is beating everyone else at a fraction of the price.” https://fortune.com/2025/01/27/mark-zuckerberg-meta-llama-assembling-war-rooms-engineers-deepseek-ai-china/. Accessed Feb. 2, 2025.
6 Howard Schneider and Michael S. Derby. Reuters. Jan. 29, 2025. “Fed leaves rates unchanged, sees no hurry to cut again.” https://www.reuters.com/markets/rates-bonds/fed-likely-keep-rates-steady-it-awaits-more-data-clarity-trump-policies-2025-01-29/. Accessed Feb. 2, 2025.
7 Federal Reserve Bank of New York. “Effective Federal Funds Rate.” https://www.newyorkfed.org/markets/reference-rates/effr. Accessed Feb. 2, 2025.
8 CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed Feb. 2, 2025.
9 Federal Reserve. Jan. 29, 2025. “Transcript of Chair Powell’s Press Conference — January 29, 2025.” https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250129.pdf. Accessed Feb. 2, 2025.
10 Jeff Cox. CNBC. Jan. 30, 2025. “GDP grew at a 2.3% pace in the fourth quarter, less than expected.” https://www.cnbc.com/2025/01/30/gdp-q4-2024-.html. Accessed Feb. 2, 2025.
11 Paul Wiseman. AP. Jan. 31, 2025. “Trump tariffs on Mexico and Canada could land this weekend. Here are some goods in the crosshairs.” https://apnews.com/article/america-canada-mexico-tariffs-trump-trade-4568dababcf524945333bb518232ec4b. Accessed Feb. 2, 2025.
12 John Butters. FactSet. Jan. 31, 2025. “Earnings Insight.” https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_013125.pdf. Accessed Feb. 2, 2025.
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