DeepSeek Disrupts the Status Quo
I can’t quite remember a week with so much news flow; thankfully, China was shut for its New Year holiday, so that part of the world wasn’t adding to the barrage! In addition to the unexpected arrival of DeepSeek to shake up the existing AI narrative, we had a Federal Reserve meeting, GDP and Inflation data, and earnings from some of the tech big boys – Apple, Tesla, and Microsoft. Rumbling in the background, we had our new president and his tariff threats, which became a reality on Saturday.
Investor reaction fluctuated between ”deep” panic on Monday to outright optimism by Friday morning, before the likelihood of tariffs being announced this weekend soured the equity markets by close of trading. The upshot was broadly neutral last week, meaning that overall, January finished as a good month for equity markets and not so bad for bonds.
Interestingly, the chart below shows that the best gains came from the most unlikely areas, with Europe and the UK leading the way. Will it continue that way, and will 2025 surprise us all by marking the end of a period of US equity exceptionalism? It’s probably too early to make that call! Oh, and the ECB cut rates …

DeepSeek good or DeepSeek bad?
Without question, the biggest news in financial markets came from the most unlikely of sources: the arrival of a little-known Chinese AI developer called DeepSeek and the launch of its new product, the R1 Chatbot. This wiped roughly $500bn off the Nvidia market cap and threatened to upend the existing status quo surrounding the AI revolution.
Until its sudden appearance, the existing narrative for the AI movement went something like this. “AI is the most essential technological advancement since the internet or arguably electricity, and it will, in time, yield massive profits. Only the real big boys, Microsoft, Google, Meta, and Apple, can afford the vast R&D costs to maximise their potential, and only Nvidia’s most advanced and expensive chips will be able to do the necessary heavy lifting.” Doubts had already been building up about the second assumption (no one questions whether AI will still be huge). Still, with billions invested and no obvious immediate commercialisation opportunities, investors had already begun to think a lot of money might be being wasted in the R&D furnaces!
DeepSeek’s chatbot seems to confirm that Big Tech might indeed be overspending. It has been built at a fraction of the cost, and its software is purportedly more efficient, running on a laptop rather than a vast data centre. Moreover, the company has open-sourced its technology, making it freely available for both individuals and businesses. Instead of selling the ‘AI magic’ like Nvidia, DeepSeek is giving it away.
Crucially, DeepSeek has achieved this using older Nvidia hardware rather than its latest chips, raising concerns over the premium placed on Nvidia’s cutting-edge technology and whether competitors, particularly in China, will soon offer viable, lower-cost alternatives. Markets are now reassessing the valuations of major AI-driven stocks. Right on time, the Bears are popping out of the woods to provide the inevitable comparison to the dot-com bubble. I don’t get that comparison; a better parallel might be the early 2000s telecom boom. Back then, exponential internet growth was correctly predicted, but the power of technology to cut costs and fuel competition was underestimated. Telecom giants like Nortel and Alcatel initially thrived but later collapsed as Chinese rivals drove prices down.
A similar trend appears to be unfolding in AI. The market will likely grow rapidly, but falling AI development costs could outpace it. This will be a massive win for consumers and innovators but a challenge for traditional AI infrastructure providers. But by mid-week there was a cry of don’t forget the ‘Jevons Paradox’! I had never heard about that before last week, but according to this 19th-century observation, as the cost of a resource drops, overall demand increases sufficiently for consumption to rise. The upshot is that we will continue to need all the AI data centre infrastructure investment, including Trump’s $500bn Stargate project. My takeaway is that it is positive for the market, except for Nvidia, as DeepSeek’s approach accelerates AI adoption and innovation. Open-sourcing its technology and optimising efficiency lowers entry barriers for developers and businesses, democratising AI tools. DeepSeek’s strategy could reshape the AI landscape, which will help boost overall global productivity. It could also increase the earnings of the Mag 7 if they decide to ease up on their current investment plans, but Nvidia looks vulnerable.
FED Talk, US Inflation & GDP
Central bankers prefer to blend into the background, and Fed Chair Jerome Powell delivered a performance as thrilling as lift music last week. With Washington in turmoil and tech giants about to take the spotlight, Powell ensured the Fed remained a steady, unremarkable presence. Rates stayed put, balance sheet policy remained unchanged, and the most notable shift was a minor wording adjustment on inflation and unemployment—enough to suggest a slightly stronger labour market but not enough to commit to a hawkish stance. When questioned, Powell dismissed it as mere ‘language cleanup’ and reassured investors it wants to cut rates—just not yet. As for Trump’s potential economic impact, Powell sidestepped, waiting for concrete developments before weighing in.
The PCE Inflation data on Friday, which he would have had sight of, also succeeded in not moving the dial, as the Federal Reserve’s key inflation measure remained steady in December, with core PCE rising 0.2% monthly and 2.8% annually—a three-month annualised rate of 2.2% signals further cooling, the lowest since July. Meanwhile, real disposable income stagnated for a second month, pushing the savings rate to a two-year low of 3.8% and hinting at slowing spending pressures. Nothing in this report suggests that inflation pressures are building, and nothing indicates that the Fed should be in any hurry to cut rates; after all, inflation remains above the 2% target.

For me, the most interesting part of the jigsaw puzzle is economic growth and earnings. While the debate over inflation and macro rate policy will move the markets over the short term, earnings will dictate the long-term trajectory. The headline GDP update for the US was a little slower than expected, with Q4 growth of 2.3%, but if you look at core real GDP growth, it rose 3.2%. This metric – real final sales to private domestic purchasers, excludes inventory changes, trade, and government spending – is probably the most accurate way of gauging the state of the economy (it is also the Fed’s preferred indicator). I would say the American economy is in rude health even before Trump injects more stimulus.

Turning to earnings, so far, so good, as they are coming in higher than analyst expectations, although Tesla again disappointed, and Trump’s removal of the EV tax credit isn’t going to help vehicle sales.
Nevertheless, Musk managed to ‘sell the sizzle’ with talk of Tesla robots that could pick your nose for you and autonomous vehicles lining up to fetch you a pizza at the tap of an app. I do not doubt all that is coming, but it’s likely a 2026 onwards story. But I digress, according to my FactSet Email on Friday…
- 36% of the companies in the S&P 500 have reported actual results for Q4 2024 to date. Of these companies, 77% have reported actual EPS above estimates.
- The fourth-quarter blended earnings growth rate (which combines actual results for companies that have reported and estimated results for companies that have yet to report) is 13.2%.
- Analysts expect (year-over-year) earnings growth rates of 10.1% and 10.9% for Q1 2025 and Q2 2025, respectively. For CY 2025, analysts predict (year-over-year) earnings growth of 14.3%.
- The forward 12-month P/E ratio is 22.0, above the 5-year average (19.8) and above the 10-year average (18.2).
So far, it is another good results season with earnings growth set fair. The valuation is, of course, a concern. Everyone knows the market is expensive, but the US market continues to be given the benefit of the doubt. Given that economic growth looks assured and productivity gains now more likely, what could possibly go wrong? In one word, Trump, or should that be Tariffs? We finally got them on Saturday, and it will be interesting to see how global markets deal with them this week.
Trump Announces Tariffs
Canada and Mexico have vowed to retaliate after Trump slapped a 25% levy on imports from its neighbours and a 10% tariff on Chinese goods. This prompted Canada to target $106 billion in U.S. products and Mexico to pledge similar countermeasures. While condemning the move, China has refrained from immediate retaliation beyond filing a WTO complaint.
The tariffs, set to take effect Tuesday, represent a significant escalation of Trump’s economic policies, punishing key trading partners for what he claims is a failure to curb illegal migration and drug flows. The new measures, far broader than those from Trump’s first term, will increase costs for American consumers on essentials like food, housing, and gasoline while threatening industries reliant on cross-border supply chains. Trump’s move also tests the limits of his executive authority, invoking emergency economic powers to justify the tariffs. Among the hardest hit, automakers warn of job losses and price hikes due to their deep ties to Canada and Mexico. While markets brace for volatility, economists caution that the tariffs could slow trade, fuel inflation, and strain relations with key U.S. allies.
Now, I found it interesting that the moves didn’t come in with immediate effect, but not until Tuesday, and I wonder if that offers a last-chance window for a deal. I also like how China didn’t flare up as they could. They are clearly trying to stay under the radar and let Mexico and Canada take the majority of the flak.
Europe
With all the drama Stateside, I nearly forgot to mention the move from the ECB, which cut interest rates for the fifth time since June, lowering the deposit rate to 2.75% as expected. While policymakers remain confident in reaching their 2% inflation target, concerns over the Eurozone’s stagnant economy persist. GDP figures showed no growth in Q4, with contractions in Germany and France adding to economic uncertainty. Political instability in the region’s top economies has further weakened business and consumer confidence and caused worry about a trade war with the U.S. However, there is no mention yet of tariffs on Europe. However, that does seem likely according to the President: ‘Am I going to impose tariffs on the European Union? Do you want the truthful answer or should I give you a political answer? Absolutely, absolutely. The European Union has treated us so terribly’, he said.
For the moment, the Eurozone will be consumed by domestic issues as France seeks budget approval on Monday and Germany’s election looms large later in the month.
As for next week, there is plenty of stuff for investors to get their teeth into…
Macroeconomic Events:
- U.S. Employment Data: On Friday, February 7, the U.S. Bureau of Labor Statistics will release the January employment report
- Global Purchasing Managers’ Index (PMI) Releases: Throughout the week, PMI data for manufacturing and services sectors will be published for various economies, including China’s Caixin PMI on Monday and Wednesday.
- BOE : The Bank of England is scheduled to announce its interest rate decision on Thursday, February 6.
Microeconomic Events:
Alphabet (Google): Expected to report a 29% increase in earnings per share and a 12% rise in revenue, reflecting growth in advertising and cloud services.
Amazon: Anticipated to announce a 49% gain in profits, driven by strong performance in e-commerce and cloud computing segments.
Biotechnology and Pharmaceutical Companies: Firms such as Pfizer, Amgen, and Eli Lilly & Novo will report their quarterly earnings, providing insights into the healthcare sector’s performance.
DOWNLOADS
There are currently no downloads associated with this article.