February 14, 2025
As per the old saying in the stock market – “As goes January, so goes the year” we seem pretty well poised for the year ahead, considering both equities and bonds delivered solid returns across the board in January. However, the unexpected advent of Chinese generative AI model, DeepSeek, caught markets unaware and spooked investors especially as it looked to dislodge the crown of the AI leaders, OpenAI’s ChatGPT and Meta’s AI. January also marked the inauguration of Donald Trump as the 47th President of the United States and the barrage of executive orders that would reshape the economic, fiscal and foreign policy of not only USA but the rest of the world at large. Since the US elections in November, investors have focussed on the pro-business agenda of President Trump. Business confidence has improved, and many indicators have pointed to an acceleration in US economic growth. The macroeconomic data remained overall supportive; the January FOMC meeting was as per market expectation with no rate cut but a slightly more hawkish narrative. Investors also cheered the robust Q4 2024 earnings releases from US companies and the US market rallied to new record highs in January.
U.S. fourth-quarter GDP growth came in at 2.3%, falling short of the 2.6% expected. This marks a slowdown from the 3.1% growth seen in the third quarter. Household consumption was the primary driver of growth, rising by 4.2%, followed by government spending. US Dec personal spending rose +0.7% m/m, stronger than expectations of +0.5% m/m while the personal income rose +0.4% m/m, which is right on expectations. The December nonfarm payrolls exceeded expectations, adding 256,000 jobs versus the consensus estimate of 150,000-160,000, while the unemployment rate dropped to 4.1%. On the inflation front, The US Dec core PCE price index, the Fed’s preferred inflation gauge, rose +0.2% m/m and +2.8% y/y, right on expectations. Analysts believe the core CPI inflation trend is still slowing towards the FOMC’s target, especially after December’s PPI came in cooler than expected.
Source: FactSet
At the January FOMC meeting, the Federal Reserve kept interest rates at the current target range of 4.25% to 4.50%, as expected, however the comments were more hawkish with policymakers warning that inflation remains “somewhat elevated.” At his press conference, Federal Reserve
Chair Jerome Powell emphasized that the central bank is in no hurry to adjust its policy stance, particularly as the economy remains strong. Fed Chair Powell also reiterated the central bank’s commitment to achieving a 2% inflation rate. Analysts expect the Fed to maintain its current stance for the time being, although some foresee potential cuts by midyear if inflation remains on target. The markets are discounting the chances at 18% for a -25 bp rate cut at the next FOMC meeting on March 18-19 with a terminal Fed rate of 3.75%.
Meeting wise Fed Interest rate probability – Source CME FEDWATCH TOOL
The month of January was marked by sharp movements in yields. In the first two weeks of January, President Trump’s proposed policies, including tax cuts, immigration restrictions, and tariffs, fueled expectations for higher US inflation, driving yields higher with the USD 10Y yields touching 4.8%. However, US government bonds later rallied, initially driven by a softer-than-expected US inflation report for December and then further boosted by the sell-off in AI tech stocks ending the month at 4.52% levels. As a result, US government bonds ended the month up 0.5% while the overall Bloomberg Global Aggregate Bond Index ended the month up 0.6%. Bond markets showed positive returns in both Europe and the United States, despite early-year pressure on long-term sovereign bond yields. This pressure stemmed from concerns about inflation risks in the U.S. and debt sustainability issues in Europe, particularly in the U.K. and France. In January, central bank policies diverged further, with rate cuts in Canada, Sweden, and Europe, while the Fed held steady after reducing rates by 100 basis points in 2024. In credit markets, spreads narrowed across both high-yield and investment-grade bonds. The US high-yield market (+1.4%) outperformed its European counterpart (+0.6%), while global investment-grade bonds returned 0.6% for the month. Meanwhile, a weaker US dollar provided support for emerging market debt, which rose by 1.2%.
Yield Chart US HY/ US IG/ US 10Y: Source Bloomberg
The return of President Trump to the White House, along with his ‘America First’ policy agenda, supported US equities. However, the rise of Chinese generative AI company DeepSeek perceived as competitive with US models like OpenAI’s ChatGPT and Meta’s AI, but developed at a much lower cost, raised concerns about the level of U.S. tech investment in AI models, pricing power, and America’s leadership in the global AI race causing significant market reactions. DeepSeek’s ability to produce efficient, low-cost AI models put pressure on Nvidia, the largest constituent of the SCP 500. Nvidia’s market value dropped by $560 billion on January 27, marking the largest single-day loss in US stock market history. The announcement led to a notable drop in US technology stocks, with the Nasdaq 100 falling by over 3% and the SCP 500 dropping by 1.5%. This pointed to the vulnerability of the US equity markets with tech concentration at record levels and stretched valuations. Despite this, the SCP 500 still reached new record highs during the month, though it closed just shy of those peaks with a gain of 2.8%. Small-cap stocks also gained, with Russell 2000 recovering part of its 8% loss from December. Market breadth was positive, with the equal-weighted SCP 500 outperforming the standard SCP500 index by more than 70 basis points. January also saw a shift from the trends of the past two years, as Europe (+7.1% for the month) outperformed the US (+2.8%), and value stocks (+4.5%) led growth stocks (+2.6%). While Washington’s developments dominated headlines, the market continued to benefit from investor optimism, deregulation trends, corporate buybacks, and some relief on interest rates. Although new tariffs were not officially announced till the month end, this has since become the new driver of market volatility as we enter February.
On the corporate earnings front, with 36% of SCP 500 companies having reported earnings for Q4’24, the results have been mixed. According to FactSet, 77% of these companies have
exceeded earnings per share (EPS) estimates, matching the 5-year average of 77% and surpassing the 10-year average of 75%. Since December 31, the largest contributors to the increase in the overall earnings growth rate for the index have been positive EPS surprises in the Financials and Communication sectors, partly offset by negative surprises in the Industrials sector. The index overall is on track to report its highest year-over-year earnings growth for Q4 in three years. The blended (actual plus estimates) earnings growth rate for Q4 stands at 13.2%, which would be the highest since Q4’21 and marks the sixth consecutive quarter of year-over- year earnings growth for the index. Seven of the eleven sectors are seeing year-over-year earnings growth for Q4, with five of these sectors experiencing double-digit growth: Financials, Communication Services, Information Technology, Consumer Discretionary, and Utilities. On the flip side, four sectors are reporting year-over-year declines in earnings, with Energy and Industrials seeing double-digit drops. On the revenue front, 63% of SCP 500 companies have reported actual revenues above estimates with Tech leading the way. This has significantly boosted the overall revenue growth rate for the index during this period.
Chart: Major Index Returns in January. Source YCharts
The MSCI World rose overall by 3.5% over the month, while the MSCI Emerging Markets gained 1.7%. However, there was considerable divergence between geographies. The top-performing major equity market in January was the MSCI Europe ex-UK Index, which rose 7.1% for the month. The gains were driven largely by the financials and consumer discretionary sectors, small exposure to tech, supported by a solid global economic environment and early signs of improvement in eurozone macroeconomic data. The eurozone composite Purchasing Managers’ Index (PMI) edged into expansionary territory at 50.2 in January, while retail sales grew 1.2% year- on-year in November, marking the fifth consecutive month of growth. UK stocks also
outperformed, with the FTSE All-Share rising 5.5%. As three-quarters of the index’s revenues come from abroad, the sharp decline in the pound provided a boost to the UK market. In China, equities saw modest gains, supported by positive domestic economic data and less aggressive tariff threats from Trump than the 60% initially suggested during his campaign. However, the underperformance of Indian equities (-3.5%) held back the overall performance of the MSCI EM Index (up 1.8%) and the MSCI Asia ex-Japan Index (up 0.8%). This decline in Indian stocks marked the fourth consecutive month of losses, driven by multiple compression, weak earnings, and an uncertain economic outlook. Japanese equities were the weakest performers in January, with the TOPIX index rising only 0.1%. With the Bank of Japan raising interest rates by 25 basis points, the upward pressure on the yen acted as a headwind for Japan’s export-driven equity market.
In other asset classes commodities were among the top performers, with the broad Bloomberg Commodity Index rising 4.0%. Gold and other metals gained in response to Trump’s tariff threats, while oil prices were boosted by cold winter weather, potential supply disruptions from US sanctions on Russia and the possibility of tariffs on Canadian oil. Gold reached a new high of
$2,805, rising 7.1% during the month. Oil prices also rebounded, with WTI rising from $71.2 to
$72.5. Bitcoin continued its upward rally albeit with volatility, ending the month up 9.3%. On the currency front, in January, the dollar showed a mixed performance after a strong overall appreciation in 2024. It declined by 0.1% against the euro but gained 0.4% against the Swiss franc. The yen strengthened by 1.3% against the U.S. dollar, primarily due to Japan’s ongoing monetary policy normalization, which included another rate hike in January.
Gold (XAU/USD) Price Chart 1 Year – Source Bloomberg
While January was overall a positive month with regard to equity market performance, it highlighted the risks for investors stemming from high concentration of the US stock market and ambitious earnings expectations. While markets may stabilize in the short term, the message sent by DeepSeek remains clear: technological dominance can no longer be taken for granted. While AI continues to be a structural theme, it is important to diversify and look beyond Magnificent-7. As February draws to a close and all firms having released results, attention is expected to shift the broader macro-outlook to individual company performance. The earnings released so far have been supportive of the markets. However, the dampener could be the implementation of the tariffs on both Mexico and Canada, which will be an important development to monitor, with potential retaliatory actions depending on the extent of tariffs. Also, market closely watches what Mr. Trump says and actions and that certainly will have market participants on the edge. However, as long as the fundamental backdrop remains positive, a big market correction may be unlikely, and investors may use this opportunity to buy the dip. Nevertheless, since the dip might be larger this time investors need to tread with caution and brace for potential volatility.
