Disruption in the AI industry, plus the latest on tariffs, earnings and market momentum.
Never had we ever heard of the Chinese startup company DeepSeek until this week, when it shocked the AI industry by claiming its newest release can compete with the likes of models from OpenAI and Google, despite being made for a fraction of the cost and requiring far less computing power. Gulp.
In the annals of history, moments of profound technological disruption often serve as wake-up calls for entire nations. The release of DeepSeek’s innovative and efficient artificial intelligence model was heralded by some as such a turning point—a “Sputnik moment” for the U.S.
Just as the Soviet Union’s 1957 launch of the satellite Sputnik catalyzed the United States’ Apollo Program, DeepSeek’s emergence sent shockwaves through the global AI industry and policy circles, and at least on Monday interrupted the upward trajectory of financial markets. Market darling Nvidia declined close to 17%—which represented $589 billion of market value—the largest-ever one-day loss for a public company. While AI stocks have subsequently rebounded in many cases, it was a jolt to investors pondering the high valuations of U.S. technology companies. It also underscored China’s position as a formidable competitive power even as tariff discussions swirl.
Speaking of tariffs, President Trump is poised to levy his first wave on Saturday against Canada and Mexico, the two biggest buyers of U.S. goods. Trump has pledged 25% tariffs on about $900 billion in goods from both nations, though it is unclear exactly which goods and if Canadian oil imports will also be included. Governments and businesses alike are rushing to skirt potential duties and prepare for retaliation. The president also indicated he would be moving forward with an additional 10% import duty on products from China, but did not specify timing. The U.S. dollar continued to climb on the back of this news.
While DeepSeek and tariffs captured much more investor attention, the Federal Reserve opted to keep interest rates steady in a range of 4.25%–4.50% this week after lowering rates by 1% in a matter of four months at the end of last year. This represents a policy pivot, but the decision was somewhat of a non-event, given the move was widely anticipated. Meanwhile, the upwards assessment of the labor market and downwards assessment of inflation improvement in the Committee’s statement suggests the Fed is increasingly willing to take a prolonged position on the sideline, if warranted by the data. We expect the central bank will continue to gauge evolving conditions and the impact of fiscal policy before committing to another rate change.
In contrast, the Bank of Canada and the European Central Bank both opted to cut interest rates in a sign of policy divergence.
U.S. GDP rose 2.3% on an annualized basis in the preliminary 2024 Q4 report following a 3.1% gain in the third quarter. While less than expected, the U.S. economy remains solid amid ongoing resilience on the part of the consumer as well as corporate investment. Inflation, however, remains stubbornly above Federal Reserve targets. The December report on personal consumption expenditures (PCE), the inflation measure preferred by the Fed, showed a year-over-year increase of 2.6%. Core PCE, which excludes volatile food and energy prices, rose 2.8% for the third straight month. The Fed aims to see PCE inflation at a 2% target, but their latest projections estimate that still might take until 2027 to achieve.
Tech company earnings reports were somewhat overshadowed by DeepSeek, but it was encouraging to see Microsoft, Meta and Apple post strong results. Tesla was the sore spot of the week with both earnings per share and revenue below forecast. Lower margins appeared to hurt the electric vehicle firm’s profit despite improvements in cost of goods sold per vehicle. The stock remained resilient, as did the shares of Microsoft, which reported Azure and cloud revenue growth of “only” 31% during the quarter.
Meta bounced back from weaker-than-forecast first quarter revenue growth thanks to Mark Zuckerberg’s prediction that 2025 will be a “really big year” for Meta’s AI assistant, which is expected to garner over 1 billion users and become the most widely used in the industry. With that, Zuckerberg said the company will spend hundreds of billions of dollars on its AI infrastructure to ensure its dominance.
And while Apple said revenue from China plunged 11% to $18.5 billion and iPhone holiday sales were weak, investors were cheered by the stellar performance of the App Store and Apple Music, which brought in an all-time record of $26.3 billion and grew 14%. Take it from this mom, who has on average 10 or 11 charges for $0.79 on her credit card each month from her kids’ downloading activity: It adds up.
By the way, what would you guess is the most downloaded app on the Apple App Store? It’s Temu, a Chinese online marketplace known for its cheap prices. The social media app TikTok is number two. Is Silicon Valley’s hegemony over? Will the disruptors be disrupted? Time will tell.
Notably, diversification is back in vogue this week as America’s tech giants tumbled while value-oriented companies in the financials, health care and industrial sectors rose. Bellwethers like Johnson & Johnson, Procter & Gamble and Coca-Cola gained ground in a long-awaited shift welcomed by many investors holding firm to valuation discipline and balanced portfolios. This shift underscores the importance of making time for portfolio reviews and rebalancing, which is our focus on your behalf, always but especially in these frothy markets.
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