Michael Reinking:
Hello, I'm Michael Reinking, Senior Market Strategist at the New York Stock Exchange, and this is Market Storylines. Every week, we are here to keep you up to date on the key trends and events driving global markets. At first, I just wanted to say a quick thank you to Jay Woods for filling in last week as I was out on the road. Now, as Jay said, this was set up to be a busy week, and it has not disappointed. So, as we record on Thursday afternoon, let's dive into this week's Market Storylines.
With over a third of companies in the S&P 500 reporting some key economic data in a wave of central bank rate decisions, we expected some volatility this week, but that came from an unlikely source on Monday. Now, last week, the S&P 500 hit a new all-time high following President Trump's inauguration and continued AI optimism after the announcement of the Stargate Project, a joint venture between OpenAI, Oracle, SoftBank, and MGX to invest $500 billion over the next four years building AI infrastructure in the United States.
Now, this sent the AI complex higher with the NYSE FANG+ index up over 4% last week, while companies exposed to that infrastructure build-out and increased power demand moves sharply higher. However, all of the enthusiasm for this investment quickly was turned on its head coming out of the weekend. Now, the catalyst for that turn actually came last Monday with the release of DeepSeek-R1, a Chinese open-source AI model which apparently is on par with other top AI models like ChatGPT or Claude. But according to the research paper released by the company, it was built at a fraction of the cost of the other models and apparently without access to some of the most advanced chips. Now, these claims have been met with a fair bit of skepticism. There was a little bit of chatter about this last week, but it wasn't until the chatbot topped the Apple Store's most downloaded apps and comments from some very influential voices in the industry over the weekend that markets started to do a deep rethink of what this meant for the AI landscape, raising questions about the US technological lead and if the cost claims were true about the potential misappropriation of billions of dollars of capital investment.
Now, this led to a very sharp sell-off in futures on Sunday night. At the lows, the S&P 500 futures were down around 3%. Now, stocks levered to the AI theme, including semiconductors, infrastructure, and power companies that led markets higher last week sold off sharply, ending the session down well over 10% as there was a shoot first ask questions later response. Now, by the end of the day, the S&P 500 only closed down around 1.5% as other areas in the market held up well and there was some rotation within tech to software and cybersecurity stocks.
Now, from a headline perspective, Tuesday turned out to be a somewhat quiet day out of some tariff headlines. But from a market perspective, it was a mirror image of Monday with some of the beaten-down stocks bouncing, which led us into a very busy day on Wednesday, including a Fed rate decision and earnings from some major tech companies.
Now, before I shift gears to the Fed, let's touch on some of those tech earnings. Over the last 24 hours, in general, the numbers have been pretty solid, but have been met with a mixed response by markets. Now, not surprisingly, commentary from management teams remained upbeat about the AI landscape, defending the capex spending and highlighting the positive of efficiency gains ultimately driving down costs and helping to speed up adoption. Now, there's still a lot of volatility across this complex and it will take some time for the dust to settle, but this week highlighted some of the risks associated with stretch valuations, index concentration, and crowded positioning.
Now, shifting to the Federal Reserve. After cutting rates at three consecutive meetings by a total of 100 basis points, the committee left rates unchanged as widely expected. Now, markets initially interpreted some minor changes to the statement as hawkish, but Chair Powell downplayed that, saying changes were not meant as a signal and the initial market response quickly reversed.
Now, his messaging was consistent with what we heard in the December meeting, continuing to point to a resilient economic backdrop, the expectation that inflation will continue to move towards the Fed's 2% target, and his view that rates remain restricted. Now, he once again showed a bias for further easing, but made it clear that the committee is in no hurry. So if you want a bit of a deeper dive on the Fed recap, check out nyse.com.
Now, looking at today's economic data, that view was confirmed with a solid GDP reading of 2.3%, a moderation from last quarter. Consumer spending was very strong up 4.2% from 3.7% in Q3. Though prices did come in slightly better than expected, but were also up from the third quarter. Now, this morning's claims data once again highlighted that separations remain low but hiring is slowing as continuing claims moved over 1.9 million for the first time since 2021.
Now, yields fell sharply on Monday in response to the risk-off move and have held the bulk of that down five to 10 basis points across the curve. Now, market expectations coming out of the meeting haven't really shifted, with futures pointing to two rate cuts through year-end with the first priced in around mid-year.
Now, as we're recording midday on Thursday, major indices are mixed for the week with the S&P 500 down modestly. If you take a step back, the index has really been consolidating in a range between 5800 and 6100 since the election and is in the upper third of that range, essentially unchanged from the December Fed meeting which kicked off a bout of volatility.
Now, with month-end tomorrow, barring a very sharp sell-up, it looks like January will end higher. For those paying attention to the seasonal indicators we've highlighted in past episodes, this would leave the market with a similar set-up to last year with the S&P 500 ending down during the measurement periods for the Santa Claus rally and the first five days, but up for the month of January. So since the 1950s, there have been seven instances where Santa failed to come to Broad and Wall, but January ended higher. The index ended up in six of those seven years with an average return of high double digits.
One last note on seasonality, February tends to be one of the toughest months for markets, and this is particularly true in the year following an election with the average return in post-election years since 1970 down a little bit over 1%. Now, as we close out this week, there are still some big catalysts ahead of us, including earnings from Apple, Visa, and the oil super majors. Tomorrow morning, we have the employee cost index and the Fed's preferred gauge of inflation, PCE, will also be released.
Now, looking ahead to next week, the economic data will include the ISM surveys and the labor market data, and it will continue to be very busy from an earnings perspective. And we'll try to spend some more time talking about that next week. Once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on tv.nyc.com or your YouTube channel, or you can listen every Friday on the Inside the ICE House Podcast feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again soon.
Speaker 2:
That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen, and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week Inside the ICE House.
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