Week in Review: January 31, 2025

February 3, 2025

Recap & Commentary

Markets ended the week lower, pressured at the start by news of a new sophisticated Chinese AI chatbot, and at the end by an announcement the US was moving forward with implementing tariffs on its three largest trading partners, beginning Tuesday, February 4. In addition, investors were focused on a busy economic calendar, the Federal Reserve’s January FOMC meeting, and earnings reports from ~100 S&P 500 companies.

Reports that a Chinese firm, DeepSeek, developed an AI-powered chatbot rivaling US-made ChatGPT, at a fraction of the cost, sent shares of Nvidia and other AI-related companies dramatically lower as investors pondered whether the high valuations of many of the “Mag 7” stocks remain justified.

On Friday, President Trump announced that he was moving forward with enacting 25% tariffs on Mexico and Canada, along with additional 10% tariffs on China. Collectively, the three countries accounted for 40% of all US imports last year while Canada accounted for over 50% of all US oil imports. All three countries have indicated they will enact retaliatory measures.

As expected, the Federal Reserve left rates unchanged, following 100bps (1%) of cumulative rate cuts at its prior three meetings. According to Fed Chair Jay Powell, following the recent rate cuts and with the economy remaining strong, the Fed does not need to “be in a hurry to adjust our policy stance.”

Through Friday, 36% of S&P 500 companies had reported 4Q24 earnings. Thus far, 77% have beaten their earnings estimate. According to industry group FactSet, earnings growth for the quarter is expected to be 13.2%.

Economic Commentary

Fourth quarter GDP growth slowed to 2.3%, down from the 3.1% pace recorded in 3Q24 and below the 2.7% consensuses forecast. Underlying details were more encouraging with consumer spending expanding at a 4.2% pace, 0.5% better than 3Q24 and the fastest pace since 1Q23. Partially offsetting that was a 5.6% decline in business spending, the sharpest drop since 1Q23, perhaps reflecting uncertainty on the part of businesses both before and after the election.

Core personal consumption expenditures (PCE), the Fed’s preferred inflation measure, increased 0.2% in December and 2.8% from a year ago. Both readings matched economists’ expectations and did little to change the broader narrative that inflation remains elevated relative to the Fed’s 2% target.

New home sales rose 3.6% in December to a 698K annualized pace, a three-month high. For the entire year, 683K new home were sold, a 2.3% increase from 2023. The median price for a new house in December rose 2.1% from a year ago, to $427K. The modest increase was attributable in part to higher mortgage rates but also elevated inventory of new homes which ended December at 494K, the highest level since December 2007.

Consumer confidence fell to a four-month low, led by a decline in consumers’ views of current economic conditions, including employment conditions.

Weekly initial jobless claims fell to a three-week low, and second lowest level since February 2024, suggesting limited layoffs.

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Of Note

Following the news of DeepSeek’s new AI chatbot, chipmaker Nvidia fell ~17% on Monday, erasing ~$600B in market cap, the largest ever one-day loss in value for a US company.

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Market Indices   (As of 01/31/2025)

• Jan. Employment Report
• ISM Manufacturing
• ISM Services
• JOLTs Job Openings
• Consumer Sentiment
• Initial Jobless Claims