China’s deep-seeking artificial intelligence (AI) applications threaten US dominance in AI. … (+)
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Important points
Markets rose last week, but pre-market declines on AI concerns weighed on profits. Earnings and economic data begin a high-stakes week that will determine market direction. Geopolitical and political uncertainty increases volatility, investors focus on bonds and key trends
The market posted strong gains last week, with the S&P 500 hitting new highs and ending the week up 1.8%. The Nasdaq Composite Index rose 1.7%, while the Russell 2000 and Dow Jones Industrial Average rose 1.8% and 2%, respectively. However, those gains were washed away in pre-market trading and ahead of a very busy week.
This morning’s drop is believed to be caused by the Chinese artificial intelligence (AI) app DeepSeek. This app is currently the top app on Apple’s App Store with very positive reviews. A concern for investors is that despite trade restrictions on AI chips, China has succeeded in developing an AI platform that appears to work very well, which could threaten US dominance in the AI field. That’s true. It is also reported that the models used were developed at significantly reduced costs, which raises the issue I talked about: the costs and returns that companies are getting on their AI investments. That’s why stocks like Amazon, Meta, Microsoft, and Nvidia will be the biggest losers in the premarket. Interestingly, Intel’s stock price is up slightly. The company, which has been snubbed during the AI hype, is untroubled by today’s news. While this is certainly a noteworthy development, it is hard to believe that this is the only reason for the market decline.
Last week I mentioned the broad-based strength we’re seeing in the market. This rally wasn’t just driven by a few stocks, and that’s a good thing. At the same time, however, valuations are at levels that are difficult to maintain. As of Friday’s close, the S&P 500’s 12-month forward P/E ratio was 22.2. This compares to a 5-year average of 19.7 and a 10-year average of 18.2. This month alone, the ratio has jumped from 21.5 in December. Therefore, one could argue that the market is pricing in a strong earnings season, and if companies fail to deliver, there could be a corresponding rebound.
As of last Friday, 16% of S&P 500 companies had announced earnings. Based on these reports, FactSet expects revenue to increase 12.7%. This week, 102 companies will announce their financial results. Some of these companies include big names like Apple, Meta Platforms, Microsoft, Starbucks, and Tesla, just to name a few. If the earnings calendar wasn’t full of information, this is also a heavy week for economic indicators.
The latest report on consumer durables will be released tomorrow. The Federal Reserve Open Market Committee (FOMC) will then meet on Wednesday, where most expect interest rates to remain unchanged. GDP will be released on Thursday, followed by the Personal Consumption Expenditure (PCE) report on Friday.
To say I’ve been busy this week is an understatement. I’ve covered the list of things coming up this week, but some might argue that part of this morning’s decline is caused by profit-taking ahead of everything else on the calendar. But I also believe that part of what we’re seeing is a reaction to the uncertainty around geopolitical events and the market’s sensitivity to that uncertainty.
President Trump over the weekend threatened to impose 25% tariffs on Colombia over the country’s refusal to accept illegal immigrants deported from the U.S., vowing to raise it to 50% by next week and retaliatory tariffs. threatened the United States. Late Sunday night, an agreement was reached on these migrants, and the threat of tariffs was taken off the table for the time being.
Markets don’t like uncertainty. Therefore, volatility is expected to increase as binary events such as earnings approach. However, markets can be equally sensitive to political uncertainty. The difference between earnings and political uncertainty is that the date the earnings will be released is known and investors have the opportunity to take a position. Sensitivity to unexpected developments can have a significant impact, as political uncertainty makes predictions more difficult.
Today, we’ll wait to see if the pre-market decline continues, or if investors see this as an opportunity and start buying the dip. There are two things I watch closely when monitoring stock prices: volatility and interest rates. In pre-market trading, the VIX was above 20, up 40% since Friday. Bonds may benefit from the stock sale, with pre-market trading already taking place and the 10-year Treasury yield falling to 4.52. This is a full 25 basis points lower than where the 10-year Treasury yield was a little over a few weeks ago. I’m also going to hear about the DeepSeek app being in a TikTok-like situation facing the threat of a ban in the US. If that happens, I’ll be interested to see how Nvidia and others will react. As always, I stick to your investment plan and long-term goals.
Tastytrade, Inc. commentary is for educational purposes only. This content is not, and is not intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for everyone.
