Artificial intelligence frenzy

New US presidential administration sets course
Markets wrap up the month with central bank decisions
AI cost concerns hit tech stocks

The first month of the new year started on a cautious note, as financial markets struggled to find clear direction following a volatile end to December. Investors balanced with uncertainties around future interest rate decisions. Early optimism was supported by solid employment data and strong earnings, but mid-month saw increased volatility as central banks emphasized a careful approach to rate changes. This mix of optimism and caution led to uneven market performance throughout the month.

As a result, developed markets’ equities (measured by MSCI World index in EUR) have risen by 3.13%, while emerging markets’ equities (measured by MSCI Emerging Market index in EUR) have gained by 1.39%. During the same period yields on bonds changed only slightly, with 10-year U.S. Treasury bond yields decreasing to 4.53% from 4.57% a month ago, while German 10-year Treasury bond yields have risen to 2.46% from 2.37% a month ago.

New US leadership brings market uncertainty

On his first day in office, President Trump made history by signing a record number of executive orders, setting a new benchmark for any administration. From a macroeconomic standpoint, these orders addressed four key areas: energy, immigration reform, tariffs, and technology. Notably, many of the policies were more moderate than expected, which provided a sense of relief for stock markets. Some level of market volatility may be expected as additional policy updates are introduced.

The administration’s upcoming proposals are expected to focus on implementing tariffs and advancing its broader pro-growth strategy, including deregulation and tax reductions. Although tariffs were a major market concern before the inauguration day, the administration has only hinted at its plans so far and has not taken immediate action. This suggests a potentially more cautious approach to policy-making than previously feared. Tariffs will likely focus on specific sectors or companies as a negotiation tool, reducing the risk of wider trade disruptions, though uncertainty remains.

Markets watch central bank moves

Central banks remain in focus as monetary policy adjustments continue to shape global markets. The Federal Reserve kept interest rates unchanged at 4.25%-4.5% as expected, maintaining its restrictive stance while assessing inflation trends. With inflation still above target, the Fed seems in no hurry to ease, though interest rates could gradually move toward a more neutral level later this year. Meanwhile, Japan's central bank took a historic step by raising its short-term policy rate to around 0.5%, its most significant move in 17 years. This decision follows accelerating inflation pressures, marking a shift in the BOJ’s approach as it balances inflation control with economic stability. With diverging monetary paths, global markets will closely watch how these policy shifts influence economic growth, corporate earnings, and investment sentiment.

AI cost concerns trigger tech selloff

Tech-focused stocks experienced a sharp decline toward the end of January, with the tech-heavy Nasdaq falling over 3%, the S&P 500 dropping more than 1.5%. The selloff was reportedly driven by news that Chinese AI startup DeepSeek has developed a highly advanced AI language model for an estimated cost of less than $6 million. This starkly contrasts with Microsoft and Meta, who are each expected to spend over $60 billion on AI this year. The unverified figures from DeepSeek have sparked questions about whether U.S. tech giants are overspending and need to reassess efficiency in their AI investments.

As a result, the Philadelphia semiconductor index (SOX) tumbled 9.2%, for its biggest percentage drop since March 2020. At the same time, the VIX, often called Wall Street’s fear gauge, jumped over 18%, getting close to its highest point this year. Whether DeepSeek’s cost estimates are accurate or not, the market reaction shows growing concerns about AI spending. With that in mind, investors may start questioning if tech giants need to be more efficient with their investments.

Nasdaq Composite index

Source: Bloomberg L.P.

Market view

January brought notable developments for financial markets, with central bank decisions, tech sector volatility, and AI investment concerns shaping sentiment. While equities faced periods of pressure, especially in tech, broader markets remained resilient. Investors continue to weigh monetary policy expectations, corporate earnings, and the evolving AI landscape as key drivers for the months ahead.

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