Macrosynthesis
TLDR
- DeepSeek’s AI Shock – Chinese AI disrupts tech, Nasdaq drops.
- Trump’s Tariffs Hit – 25% levies fuel inflation, markets slide.
- Fed Holds Rates – Strong dollar complicates Trump’s trade plans.
- PCE Inflation Jumps – Energy surge raises Fed rate concerns.
- Tesla Misses, Musk Hypes – Weak earnings, bold AI vision
DeepSeek’s Surprising Performance Causes Market Fallout
DeepSeek, a little-known Chinese AI startup, sent shockwaves through global markets after its AI model, R1, became the most downloaded app on Apple's App Store last week. The unexpected surge in popularity sparked a tech sector selloff, with Nvidia losing $593 billion in market value—the largest single-day drop for any company in Wall Street history. The futures market reacted swiftly Jan. 26th, with the Nasdaq sliding over -3% as traders scrambled to assess the implications of a low-cost AI model disrupting the industry’s existing economic order.
The collapse in tech stocks reflected deep fears about the sustainability of the AI boom. Until now, AI dominance was assumed to be directly tied to chip capacity and massive R&D spending. DeepSeek’s rise challenges this narrative, raising questions about the necessity of major infrastructure investments by META, Google, Microsoft and Oracle. With the Nasdaq already overexposed to AI-driven valuations, investors dumped shares of Nvidia, Broadcom, and Microsoft, triggering a broader risk-off sentiment. Meanwhile, Beijing celebrated the development as a sign of China’s resilience in AI innovation despite U.S. chip sanctions which forces Chinese companies to develop products without access to Nvidia's top performing processing chips.
AI's Cost Disruption: A Game Changer or a Mirage?
DeepSeek’s rapid ascent isn’t just about technical performance—it’s a wake-up call about AI economics. The company claims it built R1 using just 2,048 Nvidia H800 GPUs, at a fraction of the expense that industry leaders like OpenAI and Google have spent. The implication is profound: if DeepSeek’s model rivals or even outperforms ChatGPT and Gemini, then U.S. tech giants may have been overspending, raising concerns about efficiency in AI development. Likewise, if much cheaper processing is possible, there's less need for all the power demands being projected which have triggered astronomical gains for nuclear startups with no revenue, like NuScale (SMR) and Oklo, as well as for nuclear-heavy utilities like Constellation Energy (CEG) and Vistra (VST), which have seen their share prices rise dramatically on projected energy demand from AI-supportive data centers. These stocks all dropped substantially early last week due to fears their services and products would be far less valuable than previously though.
Skepticism in DeepSeek's figures is taking root. Some industry insiders argue that DeepSeek’s claim of building a top-tier AI model with minimal resources is misleading. Reports indicate that DeepSeek may have secretly acquired tens of thousands of Nvidia chips before U.S. export controls tightened, meaning its supposed cost advantage may not be as dramatic as advertised. Additionally, critics suspect DeepSeek benefited from China's government-backed infrastructure, which isn’t accounted for in its cost estimates. If the company is concealing a larger dependency on Nvidia hardware, the AI sector’s cost paradigm may not be as disrupted as the selloff suggests.
Other analysts have argued that even if DeepSeek did pull off the technological marvel it claims to have done, there's not a long line of businesses willing to provide proprietary business information to a Chinese tech firm - especially one that is regulated and directly influenced by the Chinese government. This influence can be seen by the chat with DeepSeek below.
Trump’s AI Reaction and the Next AI Warfront
President Donald Trump wasted no time addressing the DeepSeek-driven market chaos, calling it a “national security wake-up call” and hinting at further restrictions on U.S. chip exports to China. His administration is now reviewing whether DeepSeek violated U.S. sanctions by acquiring Nvidia chips through intermediaries in Singapore. Commerce Secretary nominee Howard Lutnick signaled a hardline stance, vowing to close any loopholes that allow Chinese firms to bypass restrictions.
Meanwhile, OpenAI responded with the release of o3-Mini, a lightweight AI model designed to be more efficient while maintaining competitive performance. The timing is strategic—meant to reassure investors that U.S. firms still lead AI innovation. However, OpenAI’s valuation, already approaching $300 billion, is under scrutiny. If DeepSeek proves that powerful AI models can be developed at a fraction of the cost, the entire AI industry could face a structural reckoning.
The AI arms race is now shifting toward economic and geopolitical fronts. As the White House prepares protectionist measures to secure American AI superiority in tech and military defense, tech leaders are scrambling to adapt to a new era where efficiency may matter more than brute-force spending.
DeepSeek’s Censorship
DeepSeek’s rise comes with a significant caveat—strict content moderation aligned with Chinese government policies. Independent testing revealed that the AI assistant censors politically sensitive topics, either refusing to respond or altering its answers mid-generation. Queries about Taiwan, Xinjiang, Tibet, and Tiananmen Square yielded state-approved narratives or outright refusals, reinforcing Beijing’s stance on these issues.
Unlike OpenAI’s ChatGPT, which offers more neutral perspectives, DeepSeek exhibits real-time self-censorship, sometimes generating responses before abruptly deleting them. While China’s government defends this as “legal internet governance,” critics argue it undermines AI’s role in free information dissemination. Interestingly, DeepSeek’s censorship primarily affects cloud-based interactions—when run locally, the model operates with fewer restrictions, raising questions about China’s approach to controlling AI narratives beyond its borders as well as its long-term strategy for becoming embedded in the fabric of the global economy before censoring.
Trump’s Tariffs on Canada, Mexico, and China
President Trump has imposed 25% tariffs on imports from Canada and Mexico and 10% tariffs on Chinese goods, citing trade imbalances, failure to stop illegal immigration and concerns that China is fueling the fentanyl epidemic by allowing its raw materials into the U.S. The move threatens to increase prices on essential imports like automobiles, electronics, toys, clothing, seemingly anything plastic, and raw materials, potentially fueling inflation.
Canada and Mexico have vowed retaliatory tariffs, with Prime Minister Trudeau calling for tit-for-tat 25% tariff response. Mexico’s President Sheinbaum warned of economic fallout and signaled a plan to reply with tariffs on U.S. goods. China strongly opposed the tariffs but has yet to outline its countermeasures aside from complaining to the World Trade Organization.
Both Canada and Mexico exports about 80% of their goods to the U.S., making them very vulnerable to U.S. import tariffs. In contrast, the U.S. only imports about 15% of its goods from each country. Although countries can find buyers of their products in other countries, and will likely do so to diversify now, that takes time.
Markets reacted negatively Friday afternoon, with the S&P 500 tumbling amid fears of rising costs and disrupted supply chains. While Trump argues tariffs will generate revenue and pressure trade partners into concessions, critics warn of escalating economic tensions and reduced global stability. President Trump has stated he plans to offset tariffs by lowering corporate and individual tax rates, but both would take an act of Congress.
Tariff War Triggers Market Risk-off Across all Sectors
A broad market selloff ensued last Friday afternoon after Trump announced the tariffs - a tax paid by U.S. businesses - on goods imported by the U.S. from Mexico, Canada, and China. Canada, a major U.S. oil importer, announced a 25% tariff on U.S. oil, liquor, beer, and vehicles, sending oil stocks (CVX), pipeline stocks (ET), natural gas stocks (NOG), fertilizer stocks (MOS), automobile stocks (GM, F), beauty stocks (ELF), beer stocks (CEZ) and shoe makers (CROX, DECK) down significantly Friday.
Fears the tariffs would trigger inflation caused a general risk-off, with crypto selling off and Gold prices rising. Bitcoin dropped over 6% while mortgage rate sensitive homebuilder stocks dropped 2.6 percent.
Over the past week, U.S. indices showed mixed performance. The Dow increased modestly by 0.3% to 44,545, while the S&P 500 fell by 1% to 6,041 and the Nasdaq declined by 1.6% to 19,627. The Russell 2000 also dropped by 1% to 2,285, and market volatility rose significantly, with the CBOE Volatility Index up 10.6% to 16.43.
Within the S&P 500 sectors, Consumer Staples, Financials, Telecom, Healthcare, and Consumer Discretionary experienced gains, with Telecom leading at a 2.7% increase and Consumer Staples close behind at 1.9%. However, other sectors such as Utilities, Industrials, Information Technology, Energy, and Real Estate saw declines, with Information Technology dropping the most at 4.6%, and Energy down by 3.8%. Materials and Real Estate showed more modest declines, at 0.2% and 0.3% respectively.
Federal Reserve Holds Rates
The Federal Reserve decided to keep interest rates at 4.25-4.5%, diverging from global central banks that have begun easing monetary policy. While the ECB and Bank of Canada have opted for rate cuts, the Fed remains cautious, prioritizing inflation control over immediate stimulus.
For President Trump, this decision complicates economic policy. With the Fed resisting rate reductions, the U.S. dollar remains strong, making exports more expensive and potentially undermining Trump’s tariff strategy aimed at reducing trade deficits. He has repeatedly called for lower interest rates to stimulate growth, but the Fed remains firm in its "wait-and-see" stance. Fed Chair Powell noted he was waiting to see the impact of Trump's policies before making any determination as to how to handle rate levels from here.
The Fed is in a difficult position now, as higher rates are elevating mortgage rates which is keeping home buyers and sellers out of the market. The lack of supply of used homes for sale has forced home prices to remain elevated and prevented existing home owners from upsizing and downsizing. Higher rates are also causing rapidly escalating credit card debt and interest rate payments by the Federal government to skyrocket. On the other hand, lower interest rates contribute to economic expansion, driving wage growth.
Tariffs are inflationary, and may cause economic contraction. If left in place long enough, Trump will be doing the Fed's job of increasing the cost of doing business and cooling the economy, perhaps enough for the Fed to relax rates further back into the "Goldilocks" scenario of moderate economic growth and low interest rates.
PCE Inflation Rises
The Personal Consumption Expense (PCE) index rose 0.3% in December, the highest in eight months, up from 0.1% in November. Goods prices increased 0.2%, while services rose 0.3%. The core PCE index ticked up 0.2%, maintaining an annual rate of 2.8%, while headline PCE inflation climbed to 2.6%. A 2.7% surge in energy costs drove the increase, signaling persistent inflation risks despite Fed efforts to cool the economy.
Job Market Weakens
Americans are growing more pessimistic about the job market, with 16.8% now saying jobs are hard to get - the highest level since March 2021. Meanwhile, those viewing jobs as plentiful dropped to 33.0%, nearing a three-year low. This trend has pushed the labor market sentiment index to its weakest in four years, historically a leading indicator of rising unemployment. As economic uncertainty grows, concerns over job stability could intensify, potentially signaling further labor market softening in the coming months.
Upcoming Events This Week
The U.S. jobs report and ISM PMIs will be key economic indicators, while traders watch Trump’s 25% tariffs on Canada and Mexico. Amazon, Alphabet, and major firms report earnings. China’s markets reopen post-Lunar New Year.
Meanwhile, India's Central Bank (RBI) and England's Central Bank (BoE) are expected to cut interest rates.
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Natural Gas
-11.77% (1W Chg)
-15.45% (1M Chg)
Platinum
+7.5% (1W Chg)
+15.25% (1M Chg)
Gold
+0.98% (1W Chg)
+5.22% (1M Chg)
Coffee
+8.94% (1W Chg)
+17.71% (1M Chg)
Company News
LevelFields AI Stock Alerts Last Week
Streaming content provider (CURI) climbed 18.8% following a 20% dividend hike, while military and postal vehicle Oshkosh (OSK) jumped 18% after raising its dividend by 11%. Crane (CR) gained 12% following a 12% dividend increase.
Apple’s Q1 Earnings: Modest Beat Amid iPhone Sales Decline
Apple (AAPL) posted Q1 earnings of $2.40 per share, exceeding estimates of $2.35, with revenue at $124.3 billion versus the expected $124.1 billion. Services revenue outperformed at $26.34 billion (est. $26.1B), while iPhone revenue fell 11% YoY to $69.14 billion, missing projections of $71.04B, largely due to weaker China sales. CEO Tim Cook attributed part of the decline to inventory adjustments, not demand weakness. Analysts remain optimistic, citing potential sales boosts from AI-driven iPhone upgrades. Apple maintained its $0.25/share dividend, but shares fell 0.7% as concerns over China’s market impact lingered.
IBM’s Q4 Earnings: AI Growth Fuels Optimism
IBM reported Q4 EPS of $3.92, surpassing estimates of $3.80, with revenue up 1% to $17.6 billion. Software revenue led the gains, rising 10%, reflecting strong demand for AI and cloud services. The company expects at least 5% revenue growth in 2025 and $13.5 billion in free cash flow, signaling confidence in its AI-driven strategy. Shares surged 12.96%, closing at $258.27, as investors welcomed IBM’s optimistic outlook and continued AI expansion. CFO James Kavanaugh emphasized the company’s open-source AI strategy as a cost-effective approach to scaling innovation.
Tesla Earnings: Missed Estimates, Bold Future Bets
Tesla missed Q4 expectations, reporting $25.7B in revenue (vs. $27.3B expected) and $0.73 EPS (vs. $0.77 expected). Full-year net income fell 23% to $8.4B, marking the second straight year of declining profits. Despite weak earnings, shares rose 4%, driven by CEO Elon Musk’s optimistic outlook on autonomous driving and AI. Tesla announced plans to start Cybercab production in 2025 and roll out lower-cost vehicles. Analysts remain divided, with JPMorgan calling Tesla’s valuation “disconnected from fundamentals.” However, investors remain bullish on Musk’s vision, including potential $10T revenue from Optimus humanoid robots.
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