Deepseek and Tariffs and Earnings, Oh My!

Last month, I referenced the season of uncertainty, and some of the uncertainties didn’t wait long to manifest some market volatility. Although it seemed a little worse than it really was, all in all, the S&P 500 is up over 3% year-to-date as of filming.

So, what was the fuss? Let’s look at three things that got the stock market’s attention: DeepSeek, Tariffs and Earnings.

Chart(s) 1, 0:38— What is DeepSeek? DeepSeek is a Chinese artificial intelligence startup emerging as a global competitor to existing AI chatbots. It originated from the AI division of a hedge fund, and it focuses on efficient, low-cost innovations in generative AI. The company grabbed attention as it claimed it was on par with U.S. models, but at a fraction of the cost.

Stocks of some of the large U.S. tech companies that have invested billions in AI initially reacted poorly to the news. Those stocks have subsequently rebounded somewhat from their respective initial drops as skepticism about some of the initial claims about DeepSeek have surfaced. Further, there’s talk of a proposed ban in the U.S.

So this is a developing story, but a good reminder that some of the high valuation mega-tech names are vulnerable to correction caused by either disappointing earnings releases, simple profit taking or a change in the competitive landscape.

Let’s move to the early leader for our word of the year: tariffs. February commenced with President Trump announcing tariffs on the U.S.’s three largest trading partners: Mexico, China and Canada. Subsequent negotiations with and concessions from Mexico and Canada delayed the threatened 25% tariffs for a month. To date, China has chosen not to negotiate in response to the new 10% tariffs on Chinese goods. Instead, it announced counter tariffs on some U.S. goods, notably American oil and agricultural equipment.

The response was measured, and the Wall Street Journal suggested that it was tailored to avoid further escalation. More recently, the president announced 25% tariffs on all steel and aluminum imports. Reciprocal tariffs are expected from affected countries, escalating trade tensions.

Chart(s) 2, 2:37— The market impact is uncertain, with some industries warning of higher costs and potential economic consequences. In other words, there are more inflation concerns.

So far, inflation expectations have ticked up slightly, in both the long and short terms, but consumer sentiment remains relatively high. This bears watching to see if U.S. consumers get spooked. It’s unknown if the threats and announcements of tariffs are part of a larger bargaining and leverage strategy, or just how many will actually go into effect.

More recently, the U.S. steel and aluminum tariffs have come on the heels of the early February announcements, but there’s little known about which countries will fall within the crosshairs of all of this, and what the time frame is. Markets were, as a result, initially unfazed. However, this uncertainty remains and will likely dominate the headlines for the time being. Investors should be prepared for potential headline-induced market volatility.

Some quick comments on corporate earnings. Fourth-quarter earnings season is in full swing, and so far, the news is mostly positive. We estimate that earnings are tracking around a 12% growth rate, comfortably above expectations. And we continue to see broadening in the S&P 500 earnings, which, as you’ve heard us state repeatedly, is healthy for the overall market. And we didn’t get the results and guidance we wanted from some of the big tech names. The results weren’t bad – they just weren’t as glorious as we’ve come to expect. But we are pleased to see some of the other sectors of the market growing above expectations.

Chart 3, 4:20— I’ll leave you this month with a review of City National Rochdale’s 2025 global market themes, administration policy, geopolitical tension, AI acceleration and equity market valuation. A number of these have already grabbed front-page status and affected daily stock market behavior – and we’re only in mid-February.

Punxsutawney Phil may have predicted six more weeks of winter, but I suspect the season of uncertainty will be longer.