Momentum Compass 27/01/2025: US tech takes big hit amid cheaper China AI competition
US stocks come off record highs as Chinese AI start-up DeepSeek threatens NVIDIA's $2T market cap ahead of key US tech and mega cap earnings, Fed, BoC and ECB rate decisions.
Last week's market recap
US equity markets continued their upward trajectory last week, with the S&P 500 reaching fresh all-time highs on Thursday before experiencing a modest pullback on Friday. Growth stocks outperformed value shares for the first time this year, while large-caps maintained their dominance over their smaller counterparts.
Economic data remained relatively sparse, though the week concluded on a concerning note as US services purchasing managers index (PMI) data disappointed and inflation expectations rose sharply. This mixed economic picture adds complexity to the upcoming Federal Reserve (Fed) decision for which no rate cut is priced in.
Political developments took centre stage following President Trump's inauguration on Monday. Market concerns about immediate tariff implementation were alleviated as the administration instead announced a review of US trade policies to assess potential future measures.
The week ahead – major US tech sell-off
The US technology sector faced pressure on Monday, with the Nasdaq 100 dropping over 3% following fears that a much cheaper Chinese DeepSeek artificial intelligence (AI), which runs on less-advanced chips, poses a serious threat to US technology companies’ dominance.
DeepSeek, the Chinese AI startup that developed a highly efficient and cost-effective AI assistant called R1, has rapidly gained popularity, surpassing ChatGPT as the top free app on the US App Store. This development has raised concerns among investors about the competitive landscape of the AI industry and the potential implications for US technology companies.
DeepSeek's AI model was developed at a fraction of the cost typically associated with such technologies, utilising less powerful chips and requiring significantly lower investment. This cost-efficiency challenges the prevailing assumption that substantial financial resources are necessary to develop advanced AI models. Consequently, investors are reassessing the valuations of major US tech companies, particularly those heavily invested in AI development and high-performance hardware.
The market reaction has been notable, with futures tracking the tech-heavy Nasdaq 100 index experiencing significant over 3% decline on Monday morning. Shares of prominent semiconductor companies, such as NVIDIA and Broadcom, have also faced substantial premarket losses. This downturn reflects investor apprehension regarding the future profitability of US tech firms in light of DeepSeek's disruptive advancements.
Major US tech earnings in the pipeline
This week brings a surge of significant market events, with major tech earnings and central bank decisions taking centre stage. Trading platforms are likely to see increased activity as investors position themselves ahead of these key events.
Tech titans Apple and Meta lead the earnings calendar, alongside aerospace giant Boeing, as the US reporting season enters its most active phase. These results and forward guidance could provide crucial insights into corporate health and economic outlook.
Central bank decisions in focus
Central bank decisions will command significant attention. While the Fed is expected to maintain current rates, both the European Central Bank (ECB) and Bank of Canada (BoC) are anticipated to adopt a more dovish stance.
Market participants will closely scrutinise guidance from Fed Chair Jerome Powell for any hints about the timing of potential rate cuts, especially given recent mixed economic signals.
Trading outlook
The broader market uptrend remains intact despite recent volatility, with the S&P 500's new highs suggesting continued momentum, provided that the early January low underpins. However, investors should remain vigilant given elevated valuations and the sharp drop in market sentiment.
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