This Week's Key Financial Catalysts

This week in financial markets saw major developments in AI, earnings, economic data, and Federal Reserve policy. China’s DeepSeek AI model shook the semiconductor sector, leading to NVIDIA’s worst single-day market cap loss. Earnings were mixed, with strong performances from IBM and Meta, while Microsoft and Tesla faced scrutiny. The FOMC held rates steady, with Chair Powell signaling patience amid ongoing economic uncertainty. Consumer spending remained strong, but inflation persisted above target. Market reactions reflected a balance between optimism and caution as investors navigated shifting conditions. Investors were able to shake off a lot of news items this week that could have sent stocks lower.

DeepSeek and Market Reactions

This week began with a significant market event as NVIDIA (NVDA) suffered its largest single-day loss in market capitalization, plummeting 17% due to concerns over China’s DeepSeek AI model. DeepSeek is perceived as a cost-effective alternative to U.S. AI models like OpenAI’s ChatGPT, as the company said it only invested $6 million, raising fears about the competitive landscape in the AI sector. DeepSeek is embracing an open-source code which contrasts to OpenAI’s hidden code. The app has soared in popularity as a result of the company giving full access to all of its capabilities without a pay wall. The downside is that DeepSeek is under Chinese rule and censorship which doesn’t allow for as wide of discussion as ChatGPT.

Investors reacted by reassessing capital spending in semiconductors, driving the PHLX Semiconductor Index (SOX) down 9.2% on Monday. Other groups related to the AI trade fell such as power and cooling companies.

However, the broader equity market remained resilient, with more S&P 500 sectors closing higher than lower. The Dow Jones Industrial Average (DJIA) rose 0.7% on Monday, and Treasury yields declined, with the 10-year yield dropping ten basis points to 4.53% and the 2-year yield falling to 4.19%.

By Tuesday, NVIDIA rebounded with an 8.8% gain, as investors bought the dip. The overall sentiment toward AI stocks remained volatile, as the long-term impact of DeepSeek on U.S. AI firms remains uncertain. Recently, Alibaba released an AI model it says is better than DeepSeek’s while Sam Altman, CEO of OpenAI, said it’s “legit invigorating to have a new competitor…more compute is more important now than ever to succeed”. There’s no doubt that DeepSeek’s capabilities at a fraction of the cost is sending waves through the AI landscape, which is still young in its development, with many tech players embracing the technology and the potential to build profits in a new frontier.

Federal Open Market Committee (FOMC) Meeting

On Wednesday, the FOMC unanimously voted to keep the target federal funds rate unchanged at 4.25-4.50%, aligning with market expectations. Notably, the statement language was revised, removing the prior acknowledgment that inflation had made progress toward the Fed’s 2% target. Instead, the Fed described inflation as "somewhat elevated."

Fed Chair Jerome Powell emphasized that, given the economy's strength, there is no urgency to adjust monetary policy. He noted that inflation remains above target and that economic conditions—including a 4.1% unemployment rate and strong consumer spending—do not warrant immediate rate cuts. Powell also highlighted uncertainty surrounding future policy impacts, including tariffs, immigration, and regulatory changes stating these things need to be articulated first before they know their implications on the economy.

Treasury yields reacted modestly, with the 10-year yield settling at 4.52% and the 2-year yield at 4.20%.

Economic Data and Trends

Several key economic reports were released this week, painting a mixed picture of the U.S. economy:

• Q4 GDP Growth: The economy expanded at an annualized rate of 2.3%, slightly down from 3.1% in the previous quarter. However, personal consumption surged 4.2%, the strongest since Q1 2023.
• Consumer Confidence: January’s reading was 104.1, below expectations of 108.1, reflecting continued consumer concerns about future employment.
• Employment Data: Weekly initial jobless claims remained low at 207,000, signaling continued labor market strength.
• Inflation: The Core PCE Price Index—the Fed’s preferred inflation gauge—rose 2.8% year-over-year for the third consecutive month, reinforcing the Fed’s cautious approach.
• Housing Market: December new home sales reached 698,000, surpassing expectations, while pending home sales fell 5.5%, highlighting volatility in the housing sector.

Earnings Recap

This week saw a flurry of earnings reports across major sectors:

• Microsoft (MSFT): Beat earnings expectations by $0.12 per share and exceeded revenue forecasts, though Azure growth (31%) was within prior guidance.
• Meta Platforms (META): Reported strong earnings, beating estimates by $1.26 per share due to strong advertising revenue. Q1 revenue guidance was in line, with long-term initiatives expected to become clearer by year-end. Zuckerburg highlighted the importance of not relying on Chinese tech, and predicted that Meta’s AI will be the leading AI assistant this year.
• Tesla (TSLA): Missed earnings and revenue expectations but reassured investors with plans for new vehicles starting production in 1H25 and Cybercab production in 2026. Lower raw material prices and improved manufacturing efficiencies have lessened the blow from their price cuts to drive sales. Energy and storage generation grew 113% year over year.
• IBM (IBM): Surged 13% after strong earnings and a promising revenue outlook. Its software segment saw 10.4% revenue growth which now makes up 45% of IBM’s business. Management sees +5% revenue growth which it hasn’t done since 3Q 2022.
• AbbVie (ABBV): Rose 6.2% on solid earnings, while Vertex Pharmaceuticals (VRTX) jumped 7.1% after receiving FDA approval for its non-opioid painkiller at the time of this article.
• Exxon Mobil (XOM) and Chevron (CVX): Both declined post-earnings, reflecting weaker-than-expected results as both were pressured by lower oil prices. At this point, it’s also unclear what effect Canada and Mexico import tariffs will have on oil imports or if they will be exempt.
• Apple (AAPL) was trading higher Friday after reporting results Thursday. The results were largely expected with revenue up 4% year over year in-line with expectations while the company beat earnings expectations. While iPhone sales results were below expectations, Apple iPhone active installed base hit an all-time high. Mac sales rose 15.5% year over year, iPad revenue was up 15.2% year over year, wearables were down 1.7% year over year, and service revenue was up 13.9% year over year.

Chart of the Week

Gold recently broke out of a trading zone to hit a new all-time high on Thursday. The metal hit an intraday high of $2,853 before closing at $2,845 and closed the week at $2835 after the Fed’s PCE Price Index was released showing stubborn inflation pressure. Volatility surrounding monetary policy and fiscal policy may be causing investors to seek safety in gold investing, all while inflation data may be ticking up again.

Conclusion

This week’s financial landscape was shaped by AI disruption, Fed policy, economic data, and corporate earnings. DeepSeek’s AI announcement rattled the semiconductor industry but did not significantly spill over into broader equities. The Fed remained cautious, keeping rates steady amid persistent inflation and strong economic growth. Corporate earnings were mixed, with Microsoft and Tesla facing pressure, while Meta and IBM outperformed. As markets digest these developments, investors will continue to focus on inflation trends, tariffs, and evolving AI competition. Next week we’ll hear from Alphabet and Amazon on their earnings announcements as well as whether they will address any changes to their capital spending plans on top of the first week of the month when we the usual economic data on payroll and ISM reports.

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Advisory services offered through Financial Sense? Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense? Securities, Inc., Member FINRA/SIPC. DBA Financial Sense? Wealth Management. Investing involves risk, including the loss of principle. Past performance is not indicative of future results.

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