Stocks Hit by AI Jitters

The S&P 500 Index ($SPX) (SPY) today is down -1.64%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -2.68%.  March E-mini S&P futures (ESH25) are down sharply by -1.70%, and March E-mini Nasdaq futures (NQH25) are down sharply by -2.78%. 

Stocks today are sharply lower, with the S&P 500 sinking to a 1-week low and the Nasdaq 100 plunging to a 1-1/2 week low.  Today’s plunge in technology stocks is dragging the overall market lower.  Chip stocks and AI-related companies are plummeting today because China’s artificial intelligence startup DeepSeek appears to provide comparable performance to Western chatbots at a fraction of the price.  The latest model of DeepSeek, released last week, is widely seen as competitive with those of OpenAI and Meta Platforms and is now at the top of Apple’s App Store rankings.  It also questions the sky-high valuations for AI-related stocks and the massive research and developmental spending business model.  Jeffries said today that “concerns have immediately emerged that DeepSeek could be a disruptor to the current AI business model, which relies on high-end chips and extensive computing power.”

Stocks were also rattled after President Trump on Sunday threatened to impose tariffs on Colombia over a dispute about deported migrants but later withdrew the threat after reaching a deal with Colombia.

Signs of weakness in China’s economy are bearish for global growth prospects.  The China Jan manufacturing PMI unexpectedly fell -1.0 to 49.1, weaker than expectations of no change at 50.1 and the steepest pace of contraction in 5 months.  Also, the Jan non-manufacturing PMI fell -2.0 to 50.2, weaker than expectations of no change at 52.2.

Today’s US economic news was better than expected and supportive of stocks.  The Dec Chicago Fed national activity index rose +0.16 to a 7-month high of 0.15, stronger than expectations of -0.06.  Also, Dec new home sales rose +3.6% m/m to 698,000, stronger than expectations of 675,000.  In addition, the Jan Dallas Fed manufacturing outlook survey unexpectedly rose +9.6 to a 3-1/4 year high of 14.1, versus expectations of a decline to 0.

The markets will look at the results of the 2-day FOMC meeting that ends on Wednesday and post-meeting comments from Fed Chair Powell.  Expectations are for the FOMC to keep the fed funds target range unchanged at 4.25%-4.50%.

Earnings season is in full swing as companies report Q4 earnings results.  Megacap technology stocks begin reporting earnings this week, with Microsoft and Tesla reporting on Wednesday and Apple reporting on Thursday.  According to Bloomberg Intelligence, analysts estimate S&P 500 earnings grew by +7.5% y/y in Q4, the second-highest pre-season forecast in the past three years.

The markets are discounting the chances at 1% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets today are lower.  The Euro Stoxx 50 fell to a 1-week low and is down -0.45%.  China’s Shanghai Composite Index fell from a 3-week high and closed down -0.06%.  Japan’s Nikkei Stock 225 closed down -0.92%.

Interest Rates

March 10-year T-notes (ZNH25) today are up +14 ticks.  The 10-year T-note yield is down -6.3 bp to 4.559%.  Mar T-notes today rallied to a 5-week high, and the 10-year T-note yield tumbled to a 5-week low of 4.496%.  Today’s sharp selloff in stocks has prompted safe-haven buying of T-notes.  Also, a decline in inflation expectations is bullish for T-notes after the 10-year breakeven inflation rate fell to a 2-1/2 week low today at 2.385%. 

T-notes fell back from their best levels after today’s news showed the Dec Chicago Fed national activity index rose more than expected to a 7-month high and Dec new home sales rose more than expected.  Supply pressures are also bearish for T-notes as the Treasury today will auction $69 billion 2-year T-notes and $70 billion 5-year T-notes as part of this week’s $213 billion auction slate of T-notes and floating rate notes.

European government bond yields today are moving lower.  The 10-year German bund yield is down -2.4 bp to 2.544%.  The 10-year UK gilt yield fell to a 3-week low of 4.555% and is down -3.6 bp to 4.592%.

The German Jan IFO business climate rose +0.4 to 85.1, stronger than expectations of 84.8.

Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at its January 30 policy meeting.

US Stock Movers

Chip stocks are sliding today after Chinese startup DeepSeek raised questions about the high valuations of the stocks.  As a result, Marvell Technology (MRVL) is down more than -14%, and Broadcom (AVGO) is down more than -12%.  Also, Nvidia (NVDA) is down more than -12% to lead losers in the Dow Jones Industrials, and Micron Technology (MU) is down more than -9%.  In addition, ASML Holding NV (ASML), Lam Research (LRCX), Applied Materials (AMAT), Advanced Micro Devices (AMD), and KLA Corp (KLAC) are down more than -4%. 

AI and AI infrastructure stocks are under pressure amid concerns that AI models from Chinese firm DeepSeek could disrupt US technological leadership.  As a result, ARM Holdings (ARM) and Oracle (ORCL) are down more than -7%.  Also, Super Micro Computer (SMCI) is down more than -6%, and Palantir Technologies (PLTR) is down more than -3%.  

Cryptocurrency-exposed stocks are falling today, with the price of Bitcoin down more than -3% to a 1-week low.  As a result, Riot Platforms (RIOT) is down more than 12%.  Also, Mara Holdings (MARA) is down more than -6%, Coinbase Global (COIN) is down more than -4%, and MicroStrategy (MSTR) is down more than -2%.   

SoFi Technologies (SOFI) is down more than -7% after forecasting full-year adjusted Ebitda of $845 million-$865 million, well below the consensus of $905.6 million.

GE Vernova (GEV) is down more than -17% after Guggenheim Securities downgraded the stock to neutral from buy. 

Public Service Enterprise Group (PEG) is down more than -7% after Barclays downgraded the stock to equal weight from overweight.

Akero Therapeutics (AKRO) is up more than +120% after releasing promising results from a mid-stage trial of its experimental treatment for patients with cirrhosis due to metabolic dysfunction-associated steatohepatitis, a liver disease.

AT&T (T) is up more than +5% to lead gainers in the S&P 500 after reporting Q4 adjusted EPS of 54 cents, above the consensus of 50 cents.

Salesforce (CRM) is up more than +3% to lead gainers in the Dow Jones Industrials, and ServiceNow (NOW) is up more than +3% after Barclays said both  companies “should benefit from cheaper AI models.”

Defensive healthcare and consumer staple stocks are climbing today with the selloff in the broader market.  Kraft Heinz (KHC), Tyson Foods (TSN), General Mills (GIS), Conagra Brands (CAG), UnitedHealth Group (UNH), Johnson & Johnson (JNJ), CVS Health (CVS), Cigna Group (CI), Molina Healthcare (MOH), and JM Smucker (SJM) are up more than +2%. 

Logility Supply Chain Solutions (LGTY) is up more than +25% after Aptean agreed to acquire the company for $14.30 per share. 

Crown Castle (CCI) is up more than +3% after JMP Securities initiated coverage of the stock with a recommendation of outperform and a price target of $115. 

Portillo’s (PTLO) is up more than +6% after Stifel upgraded the stock to buy from hold with a price target of $16. 

American Tower (AMT) is up more than +2% after JMP Securities initiated coverage of the stock with a recommendation of outperform and a price target of $225. 

Waste Management (WM) is up more than +1% after Scotiabank upgraded the stock to sector outperform from sector perform with a price target of $250. 

Earnings Reports (1/27/2025)

Alexandria Real Estate Equities (ARE), AT&T Inc (T), Brown & Brown Inc (BRO), Nucor Corp (NUE), W R Berkley Corp (WRB).