MARKETS WOBBLE AS INVESTORS WORRY ABOUT AI VALUATIONS AMIDST RISING BIG TECH EARNINGS

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Data Sourced from FE Analytics, and Bloomberg Finance LP

MARKETS WOBBLE AS INVESTORS WORRY ABOUT AI VALUATIONS AMIDST RISING BIG TECH EARNINGS

This week the release of a cut-price Chinese AI model caused considerable excitement as it cast doubt on the valuations of the firms currently leading the AI race and on whether the vast amount of money being spent to secure market position is necessary. Despite the sharp dip in AI and microchip stocks, like most recent sell-offs, the recovery has been almost as swift as the decline. As Softbank’s $25bn investment pledge shows, investors fear missing out. It serves as a warning that the eventual leaders in this industry may not be the current favourites.

After the bumpy start to the week, it was business as usual for the big US tech stocks as most of the companies reporting provided positive updates and this helped a generally positive mood in markets. Despite the Federal Reserve holding interest rates, government bonds rallied and UK and European equity markets gained. The one fly in the ointment was the promise of US tariffs on Canadian and Mexican imports as soon as this weekend. This drove up the US dollar and the gold price also gained as US investors build stockpiles in advance of any new tariffs.

RATES: CENTRAL BANKS DIVERGE ON POLICY

The Federal Reserve left interest rates on hold and indicated it is not in a hurry to make further cuts. Although US economic growth slowed in Q4 of last year, the Fed is content to keep interest rates restrictive to ensure inflation continues to slow. President Trump criticised the decision and has previously called for rates to be swiftly reduced. Markets were more even tempered. Investors forecast one or two rate cuts this year and US treasury yields fell as government bonds gained slightly. This helped lift the value of UK government bonds as well. The dollar gained against most major currencies.

Meanwhile, a sixth consecutive cut from the Bank of Canada brought rates down to 3%. The bank forecast rising GDP growth but said the latest rate decision was influenced by the recession risk of US trade tariffs. The European Central Bank also cut rates by 0.25% to 2.75% as it warned of fragile consumer confidence and weak economic growth in the short term. The Eurozone didn’t grow in the last quarter of 2024, the latest GDP update showed.

AI: CHINESE KNOCKOFF SENDS TECH STOCKS INTO TAILSPIN

Chinese start-up DeepSeek released an AI model called R1 last week, that is comparable to top models from OpenAI, Anthropic, Google and Meta. It claims similar results, despite being developed faster on a shoestring budget, using less than state-of-the art chips. Unlike its competitors, DeepSeek shared details of its model so others can run it on their own systems, leaving the door open for even more competition.

R1’s release led to a sell-off in tech stocks in Asia, Europe and the US. The Nasdaq dropped 3% and leading AI chipmaker Nvidia plunged 17.8%, losing $600bn in market value. Other big tech companies also dropped as markets priced in slightly higher odds that AI is not a winner-take-all game. Stocks behind the emerging data centre economy, like utility providers Vistra and Constellation, were hit even harder as future power needs of AI infrastructure were reassessed. Open AI welcomed the competition but accused DeepSeek of technology theft, and is attracting a fresh $25bn from SoftBank.

TECH: EARNINGS MISS BUT TECH DOUBLES DOWN ON INVESTMENT

Four of the Magnificent Seven, reported growing revenues and more spending on AI models, infrastructure and products this week. Microsoft’s Q4 earnings jumped 12% to $69.6bn, but sales of its cloud division—its biggest revenue driver—narrowly missed expectations despite a 21% jump from a year ago, sending its shares down 5.1%. Microsoft is struggling to keep pace with customer demand for AI-related services. Meta topped expectations with a 21% jump in revenues to $48.4bn with yet more growth in profits and promised to rocket its AI spending by 70% to $60bn this year. Apple’s revenues grew to $124.3bn, despite lower iPhone sales due to stiff Chinese competition, and amidst concerns about the impact of possible US tariffs on China and Taiwan.

Tesla’s revenues edged up to $25.7bn as its EV sales disappointed, by declining for the first time since 2011. Elon Musk was contrastingly optimistic and promised to bring driverless taxis and humanoid robots to market, whilst dodging giving set dates and belittling rivals.

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