This Bloomberg Surveillance segment discusses the upcoming Federal Reserve decision and the implications of big tech earnings, particularly concerning artificial intelligence investments and potential trade tariffs. Analysts debate the Federal Reserve’s likely course of action—a pause or a skip in rate cuts—and the market’s reaction. The discussion also covers the impact of China’s new AI technology, DeepSeek, on tech valuations and global competition. Concerns arise about DeepSeek’s potential unauthorized data access and its implications for the AI sector. Finally, the potential for President Trump to impose tariffs on Mexico, Canada, and China is analyzed, along with the potential market responses.

Source Material Review: Study Guide

Quiz

Instructions: Answer each question in 2-3 sentences.

1. What is the significance of the upcoming earnings reports from Microsoft, Meta, and Tesla, and what key areas will be closely examined?
2. How is the artificial intelligence (AI) boom impacting chip manufacturers, and what shift is occurring in AI spending beyond just chips?
3. What is the difference between the Federal Reserve’s potential “skip” versus a “pause” in interest rate decisions, and what does each imply?
4. According to Julian Emanuel, what is the significance of 2025 in relation to AI adoption and development?
5. What are the implications of the DeepSeek AI announcement, and how did it initially affect market sentiment?
6. What are some of the potential retaliatory measures Canada and Mexico could take in response to US tariffs?
7. How is President Trump approaching the federal workforce, and what are some parallels to Elon Musk’s actions at Twitter?
8. What factors are contributing to the increased demand for industrial metals, and how might tariffs impact their pricing?
9. What are the main points of concern surrounding the DeepSeek AI and its potential ties to OpenAI, and what is the response from Microsoft and others?
10. How is the focus shifting from large tech players to companies adopting and applying AI, and what type of firms are expected to lead in this tech diffusion cycle?

Quiz Answer Key

1. The earnings reports from Microsoft, Meta, and Tesla are crucial for understanding big tech spending on AI, capital expenditures, and future development plans. Investors will be closely examining how these companies plan to adapt and monetize their AI advancements.
2. The AI boom has greatly increased the demand for chip manufacturing equipment, but spending is now shifting towards AI applications rather than just chip development. This indicates a broadening of AI investment across sectors.
3. A “skip” by the Federal Reserve implies a downward trajectory in interest rates, whereas a “pause” indicates uncertainty, a potential end to rate hikes, or a lack of clarity. A pause suggests the Fed is unsure of future action and may potentially hold rates steady.
4. Julian Emanuel views 2025 as the inflection year for AI adoption, meaning widespread adoption will begin this year, and the emergence of DeepSeek has catalyzed this process and accelerated timelines for AI.
5. The DeepSeek AI announcement initially caused a market sell-off due to concerns about competition and valuation. The main concern being DeepSeek’s rapid development and its potentially disruptive effects on the AI landscape.
6. Canada and Mexico could retaliate with tariffs on US goods, particularly oil imports from Canada. This type of retaliation, however, is seen as not the most effective approach in terms of achieving long-term policy solutions.
7. President Trump is acting like a CEO trying to downsize the federal workforce through buyouts, mirroring Elon Musk’s actions at Twitter. He’s also trying to freeze federal spending, particularly in areas he sees as ideologically driven like DEI initiatives.
8. Increased demand for industrial metals is driven by supply-side underinvestment over the past decade, an energy transition push, and increased spending by the US and Europe. These factors are leading to tight supplies and price increases, with tariffs potentially creating additional price pressures.
9. There are concerns that DeepSeek may have obtained unauthorized data outputs from OpenAI and has also used distillation methods. This raises questions about the legitimacy of DeepSeek’s development and challenges existing AI development processes.
10. The focus is shifting from large tech players to companies that are successfully adopting and applying AI in their business operations. These next market leaders are expected to be the ones driving efficiencies and effectiveness via using AI in their operations and business models.

Essay Questions

Instructions: Answer each question in a well-structured essay format. Consider all parts of the text in your answer.

1. Analyze the complex interplay between technological innovation (specifically AI), market valuations, and Federal Reserve policy as presented in the source material. How are these forces shaping investment strategies and market behavior?
2. Evaluate the potential economic impacts of President Trump’s proposed tariff policies on trade and industries, especially in relation to the views of experts and market analysts expressed in the text.
3. Discuss the significance of the DeepSeek AI development in the context of both technological advancements and global competition. How might this development alter the current dynamics in the AI sector?
4. Assess the various perspectives on the Federal Reserve’s monetary policy decisions and their potential implications for the market, particularly within the context of a new administration’s economic policies.
5. Compare and contrast the long-term investment strategies discussed by various market analysts, considering themes such as sector allocation, diversification, and the potential impact of geopolitical events.

Glossary of Key Terms

• AI (Artificial Intelligence): The ability of a computer or a robot controlled by a computer to do tasks that are usually done by humans because they require human intelligence and discernment.
• ASML: A Dutch company that makes equipment to manufacture semiconductor chips.
• Basis Point: A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point equals 0.01% or 1/100th of 1%.
• Bifurcation: The division of something into two branches or parts, especially in regards to the way something is growing and changing.
• Bond Vigilantes: Bond investors who react to a government’s policies by selling bonds. Usually this is done due to the markets’ perception that a government is mismanaging its debt or is engaging in inflationary spending.
• Bookings: An order that has been placed, but not yet fulfilled.
• CAPEX (Capital Expenditure): Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.
• DeepSeek AI: A Chinese AI start-up that recently unveiled a new large language model.
• Disinflationary Impulse: A slowing down in the rate of inflation, often caused by a new technology that improves efficiency or by an economic policy that reduces prices.
• Distillation: In AI, a technique where a simpler model is trained using the output of a more complex model; in this context, it implies DeepSeek is using OpenAI’s output to develop its own AI, which is seen as a potential issue.
• ECB (European Central Bank): The central bank of the Eurozone, responsible for monetary policy.
• Equity Futures: A contract that allows an investor to buy or sell a certain amount of a stock index at a specific future date.
• Federal Reserve (The Fed): The central bank of the United States, which is responsible for monetary policy.
• FOMC (Federal Open Market Committee): The policy-making body of the Federal Reserve System.
• GenAI (Generative AI): A type of AI that can generate new content, such as text, images, or code.
• Hyperscalers: A company that provides cloud computing, networking, and internet services at a large scale; it has large scale data centers.
• Inflection Year: A year in which a major change or turning point occurs, usually signaling a shift in trends or the beginning of a new phase.
• LLM’s (Large Language Models): A type of AI model that has been trained on a large dataset to generate human-like text.
• Mag Seven: Refers to the seven most influential technology stocks in the US: Apple, Microsoft, Alphabet (Google), Amazon, NVIDIA, Tesla, Meta Platforms
• Monetization: The process of converting something into revenue or profit.
• Open Source Chassis: A framework for developing software or other digital products that can be used and modified by anyone for any purpose, making it free and accessible to all.
• PNTR (Permanent Normal Trade Relations): A trade status that indicates that a country has trade and economic relations with another country on a permanent basis, and that trade between the two will be conducted with the most favorable terms and tariffs.
• QT (Quantitative Tightening): A monetary policy measure by which a central bank reduces the size of its balance sheet, typically by not reinvesting the proceeds from maturing bonds.
• S&P 500: A stock market index that measures the stock performance of 500 of the largest publicly traded companies in the United States.
• Section 301 Report: The United States Trade Representative (USTR) has the power to conduct section 301 investigations. This investigation usually involves complaints about unfair trade practices by other countries and are used to take actions like placing tariffs on the goods from the other country.
• TSMC: Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip manufacturer.
• USMCA: The United States-Mexico-Canada Agreement, a free trade agreement between the three countries.
• USTR (United States Trade Representative): The U.S. government agency responsible for trade negotiations and policy.
• Yield: The return on an investment, typically expressed as an annual percentage.

Bloomberg Surveillance: Markets, AI, and Geopolitical Uncertainty

Okay, here’s a detailed briefing document summarizing the main themes and important ideas from the provided Bloomberg Surveillance transcript:

Briefing Document: Key Themes and Ideas

I. Overview:

This Bloomberg Surveillance transcript covers a dynamic day in the markets, focusing on the confluence of major events: a Federal Reserve decision, significant tech earnings (Microsoft, Meta, Tesla), and looming trade tariff deadlines, all under the backdrop of a new Trump administration and emerging AI advancements. The conversation is framed by both economic and political uncertainties, creating a volatile environment.

II. Key Themes:

1. AI Revolution & Its Impact:

• DeepSeek’s Emergence: The emergence of DeepSeek, a Chinese AI startup, has triggered both excitement and concern. The reported cheaper model and its potential impact on established players are generating significant discussion.
• “WHAT IT REALLY MEANS IS THE RACE IS ON TO IMPLEMENT AND FROM OUR WORK 2025 IN THE WORK WE DID ALMOST TWO YEARS AGO NOW WHEN AI WAS FIRST INTRODUCED IS 2020 FIVE WAS GOING TO BE THE INFLECTION YEAR IN ADOPTION AND THIS CATALYZES IT.”
• Monetization & Capital Expenditure: The discussion centers on how companies will monetize AI investments and justify large capital expenditures (capex). The question is whether this is a “one-off” infrastructure spend or an ongoing need. The shift from spending on chips and data centers to broader applications is being scrutinized.
• “HOW MUCH THEY PLAN TO SPEND ON CAPITAL EXPENDITURES AND ADJUST AND ADAPT ARTIFICIAL INTELLIGENCE SPEND AND DEVELOPMENT.”
• Efficiency Gains: There is an expectation that AI will lead to efficiency gains, with some experts saying their own teams increased efficiency 15% using AI tools. However, questions remain about when these gains will translate to bottom-line results.
• “WE ASKED OUR COLLEAGUES HOW MUCH HAVE YOU IMPROVED YOUR EFFICIENCY IN THE LAST 12 MONTHS ON THE BACK OF THESE NEW TOOLS? THE AVERAGE WAS 15%.”
• Open Source vs. Closed Source: The conversation touches on the debate between open-source and closed-source AI models and whether this will democratize or consolidate AI power.

1. Big Tech Earnings:

• Focus on Forward Guidance: Analysts are more focused on forward guidance from tech companies rather than past quarterly results. The key question is whether these companies are optimistic or measured about the near future.
• “PEOPLE ARE LOOKING FOR THAT GUIDANCE MORE THAN WHAT THEY DO FOR THE FOURTH QUARTER. LOOKING FOR THE GUIDANCE TO SEE ARE TECH COMPANIES MORE MEASURED OR MORE OPTIMISTIC.”
• Valuation Concerns: High valuations in tech are a point of concern, with questions about whether current stock prices are justified given the level of spending on AI projects.
• “I’M NOT WORRIED ABOUT THE VALUATIONS HERE.”
• Competition and Disruption: There is discussion on whether the Magnificent Seven will maintain their dominance or if new competitors will emerge, especially considering the advancements from Chinese companies like DeepSeek and Alibaba.
• “THE MAGNIFICENT SEVEN ARE MAGNIFICENT FOR A REASON. IT DOESN’T MEAN THERE AREN’T OTHER COMPANIES DOUBLE COMPETE AND CHALLENGE THE DOMINANCE.”
• Specific Company AnalysisMeta: Analysts believe Meta could benefit from cheaper AI models due to its advertising sales, and that Meta could be the biggest beneficiary if TikTok is banned. Also, there was commentary on how Zuckerberg is cozying up to the Trump administration.
• Tesla: While sales numbers are still a major focus, it’s clear long-term vision of autonomous vehicles and robotaxis is influencing its valuation. Also, its ability to keep scaling production is a point of focus.
• Apple: Analysts aren’t as bullish on Apple given slower growth and reduced sales for iPhones. Questions remain on whether the company will also begin to lean into AI to a greater extent.

1. Federal Reserve Decision & Policy:

• Pause vs. Skip: The primary debate is whether the Fed will “pause” or “skip” rate hikes. A skip implies a downward trend in rates, whereas a pause means a potential flat line.
• “THE DISTINCTION HERE BEING THE SKIP IMPLIES THERE IS A DOWNWARD STRUCTURE IN RATES. APPLAUSE MEANS WE HAVE NO CLUE.”
• Data Dependency: The Fed’s data-dependent approach is being questioned, with calls for a more strategic approach considering the rapidly changing environment.
• “THE FED, AND YOU HAVE HEARD ME SAY THIS FOR A LONG TIME, HAS GOT TO GET MORE STRATEGIC IN ITS APPROACH AND HAS GOT TO STOP BEING EXCESSIVELY DATA DEPENDENT.”
• Political Influence: The Fed’s decisions are heavily influenced by and are influencing President Trump’s policies, with potential conflicts.
• “WE ARE POLICY DEPENDED AT THE FEDERAL RESERVE. I MEAN WHITE HOUSE POLICY DEPENDENT ON THE FOMC.”
• Uncertainty: A central theme is the uncertainty around policy decisions given the Trump administration’s unpredictability. The consensus is that Fed Chair Powell will likely try to be as boring as possible, to not provoke any reaction from the White House.
• “I THINK POWELL TODAY WILL BE VERY MEASURED. I THINK HE IS GOING TO SAY VERY LITTLE IN THIS PRESS CONFERENCE. I THINK HE WILL TRY TO SAY AS LITTLE AS POSSIBLE ABOUT ANYTHING THAT HAS TO DO WITH THE WHITE HOUSE. “

1. Trade and Tariffs:

• Trump’s Tariff Deadlines: Trump’s self-imposed tariff deadlines with Canada, Mexico, and potentially China are creating significant market uncertainty and anxiety.
• “THE PRESIDENT HAS MADE IT CLEAR AGAIN HE EXPECTS EVERY NATION AROUND THIS WORLD TO COOPERATE WITH THE REPATRIATION OF THEIR CITIZENS AND THE FEDERER A FIRST STATE FOR CANADA AND MEXICO STILL HOLDS.”
• Negotiating Tool?: There’s speculation whether tariffs are negotiating tactics or a real intent to disrupt trade. Many believe the tariffs are linked to political issues (immigration, fentanyl) rather than purely economic.
• Retaliation: Potential retaliatory tariffs from trading partners (Canada, Mexico, EU, China) are a key concern, particularly given the current high valuations in equity markets.
• Supply Chain Vulnerabilities: Businesses are advised to assess supply chain vulnerabilities, given potential disruptions from these tariffs.

1. Market Volatility and Risk:

• Elevated Equity Positioning: Equity positioning is high, making the markets susceptible to shocks.
• Bond Market Influence: Long-term bond yields are seen as a headwind for equity valuations, particularly if they approach 4.75%. There’s also discussion on whether gold is a safe haven asset and how it relates to risk assets.
• “Tipping Point”: There is a sentiment that we may be at a “tipping point” with shifts in how companies are being valued given new technological realities.
• De-Globalization and its Impact: The trend towards de-globalization as a result of new Trump policies is being discussed as well, and its potential to drive inflation.

III. Key Facts and Figures:

• ASML: Bookings more than doubled analyst estimates, surging nearly 9%.
• Gold: Trading near an all-time high amid tariff uncertainty.
• ASML: China sales are expected to drop 20% of total revenue.
• S&P Futures: Trading mostly positive on the day, albeit volatile.
• US Trade Deficit: Widened to -$122B in the most recent report, higher than expected and a potential point of conflict for Trump

IV. Important Quotes:

• “THESE BIG TECH NAMES ARE NOT AN OBVIOUS LOSER TO ME.”
• “IT’S GOING TO BE ABOUT BIG TECH, HOW MUCH THEY PLAN TO SPEND ON CAPITAL EXPENDITURES AND ADJUST AND ADAPT ARTIFICIAL INTELLIGENCE SPEND AND DEVELOPMENT.”
• “THE IDEA THAT THESE PLAYERS GIVEN THEIR EQUIPMENT IS IN SO MUCH DEMAND SHOULD CONTINUE TO DO WELL.”
• “WE THINK IT IS SKIP NOT PAUSE.”
• “THE TREND TOWARDS INFLATION IF YOU THINK ABOUT IT, THE LAST SEVERAL MONTHS VERY MUCH LIKE THE SPRING OF 2024.”
• “THE CONSENSUS SEEMS TO BE CLOSER TO MAYBE A PAUSE THAN A SKIP.”
• “THE PRESIDENT HAS MADE IT CLEAR HE EXPECTS EVERY NATION AROUND THIS WORLD TO COOPERATE WITH THE REPATRIATION OF THEIR CITIZENS.”
• “YOU HAVE TO ASSUME THE METALS ARE AVAILABLE WHEN WE NEED THEM.”
• “WHAT CAUSES U.S. EXCEPTIONALISM? IT IS TECH INNOVATION.”
• “I THINK THERE IS AN ACKNOWLEDGMENT OF THE IMPORTANCE OF FINANCIAL MARKETS AND THE DESIRE NOT TO DISRUPT THAT NARRATIVE, TO BE ABLE TO LONG-TERM IMPLEMENT POLICY.”
• “THE FED HAS TO GET MORE STRATEGIC IN ITS APPROACH AND HAS TO BE STOPPING EXCESSIVELY DATA DEPENDENT.”

V. Conclusion:

The transcript paints a picture of a highly complex and volatile market environment. The combination of major tech earnings, uncertainty surrounding the Fed’s decision, and looming trade tariff deadlines has created significant market risks. The potential for rapid shifts in narratives, especially around AI adoption and policy decisions, adds to the complexity. Investors are advised to stay alert to new developments this week and be prepared for a turbulent period.

Let me know if you have any other questions!

Big Tech, AI, and the 2025 Economic Outlook

Frequently Asked Questions (FAQ)

1. Why is there so much focus on Big Tech earnings this week, particularly for companies like Microsoft, Meta, and Tesla?

Big Tech earnings are under intense scrutiny because they serve as a bellwether for the broader economy and innovation trends. After a period of somewhat lackluster performance since the beginning of December, investors are keenly watching these earnings reports to see how these companies are addressing current economic conditions, especially around inflation and AI investment, as well as any impact from increased competition. The focus is less on past performance and more on future guidance and spending plans, particularly regarding capital expenditures (CAPEX) related to AI. Additionally, the market wants to gauge whether these tech giants can justify large AI investments given recent price reactions and the emergence of competitors.

2. What is driving the current discussion around AI, and why is 2025 being called an “inflection year” for its adoption?

The buzz around AI is driven by its potential as a revolutionary technology poised to transform industries and the global economy. The emergence of models like DeepSeek has intensified competition and accelerated the race to implement AI. 2025 is considered an inflection point because many believe it marks the start of widespread adoption across various sectors. This is moving past the research and development phase and into practical applications. Investors are paying close attention to how these companies are monetizing and deploying this technology. The shift is moving from investment in the chips and data sectors to broader applications and infrastructure buildouts.

3. How is the Federal Reserve navigating the current economic landscape, and what is the debate between a “skip” and a “pause” in interest rate policy?

The Federal Reserve is trying to balance controlling inflation with fostering economic growth, all while navigating policy uncertainty introduced by the new administration. The debate over a “skip” versus a “pause” in interest rate hikes reflects the nuances of their current policy. A “skip” implies a deliberate downward trajectory for interest rates while a “pause” suggests a wait-and-see approach, potentially signaling that rate hikes are done for the cycle but no guarantee of future cuts. The consensus seems to lean towards a pause but ultimately the Fed is watching the data closely, and waiting for more clarity amidst uncertainty.

4. What is the market’s reaction to potential tariff implementations by the U.S. government, and why is there a lack of clarity on the trade front?

The market is very sensitive to the possibility of new tariffs, particularly those targeting Mexico and Canada, as well as China. There’s considerable uncertainty about the details of these tariffs, including their levels and effective dates, and whether they will be used as negotiating tools. The lack of clarity creates market volatility, and businesses are struggling to assess the potential impacts. Also, there is the question of how long-term investors view this situation in the long run, as well as how much these tariffs will influence the earnings and valuations of companies exposed to the trade dynamics. Some see that tariffs may not be priced in and others are saying that it is, meaning the impact is not clear.

5. How is the rise of Chinese AI companies impacting the technology landscape, and what is the significance of the DeepSeek model?

The rise of Chinese AI companies is adding complexity to the global technology landscape. DeepSeek is considered significant due to its ability to compete with existing models at a lower cost. This development is prompting investigations into potential unauthorized data usage. The emergence of DeepSeek serves as a reminder of the importance of innovation, as well as increased competition and the potential challenges of open-source AI technologies. There is debate on whether DeepSeek’s capabilities are the result of using output from other AI models, not actual independent research. This highlights broader concerns about the origin, authenticity, and ethical implications of newly developed AI technologies.

6. Beyond Big Tech, what are some other notable sector trends that are emerging, and why are they important?

Beyond Big Tech, trends include the growing importance of the semiconductor industry, especially companies like ASML, which are experiencing increased demand due to the AI boom. Additionally, there is a noted demand for industrial metals, which are needed for the energy transition and various industrial sectors. The energy transition itself is driving shifts as well, impacting utilities. The efficiency gains that various sectors are achieving through AI adoption are a significant point of focus, indicating changes in productivity.

7. How are U.S. government policies, especially trade and spending measures, shaping the current economic outlook?

The new administration’s policies are creating uncertainty, especially around trade and fiscal measures. There is a focus on actions like potential tariffs, repatriation of citizens, and changes in federal spending, which can have wide-ranging implications for the economy and financial markets. The administration is also pushing for more domestic supply chains and is taking measures to reduce what it sees as unnecessary federal spending. The push-pull of these decisions is impacting investor confidence, and it remains to be seen how far the administration will press on policy implementation given how much the bond market dictates these changes.

8. What is the significance of gold in the current market environment, and how is it viewed as a safe haven asset?

Gold is viewed as a safe haven asset amidst uncertainty in the market, including tensions between the Federal Reserve and the White House, as well as the possibility of new trade disputes. Gold prices are resilient given the current economic environment and its structural appeal, where there is increasing apprehension and volatility, making it a popular asset to turn to when the economic outlook is uncertain. It tends to perform well when economic activity slows down, and its resilience during periods of market volatility highlights its continued attractiveness to investors looking to reduce risk. Additionally, some central banks are looking at it as a viable alternative to US treasuries, given the current high deficit and the potential for volatility.

Tech Earnings & the AI Revolution

Several technology companies, including Microsoft, Meta, and Tesla, are scheduled to report earnings [1, 2]. These reports are highly anticipated and will be closely scrutinized by investors [1, 3]. The tech sector has seen some lackluster performance since December, and investors are looking for guidance, specifically for 2025-2026 [3].

Key themes to look for in the tech earnings reports:

• AI spending: Investors will be looking to see how much companies plan to spend on capital expenditures, artificial intelligence (AI) development, and infrastructure [1]. It is important to understand whether this is a one-off infrastructure spend, or an ongoing investment in AI [1]. There are questions around whether companies will be able to achieve efficiencies with software, and if they will be using open-source chassis [3].
• Monetizing AI: The market will also be interested to see if these companies are effectively monetizing AI, and what the details of that expenditure are [4].
• Forward Guidance: Investors are less focused on Q4 earnings, and more focused on forward guidance [3]. They want to see whether tech companies are more measured or optimistic about future earnings [3].
• Tipping Point: There is a question of whether AI investment is moving to broader applications, and if the earnings reports will suggest that this tipping point has been reached [3]. The market is looking for companies that are adopters and app developers that are using AI to drive efficiency [5].
• Valuations: Valuations will be closely scrutinized, especially after the recent Deepseek news [1, 2]. Less than perfect or very good news will likely be met with a violent reaction from the market [6].
• Deepseek: There are also questions around Deepseek and whether that company obtained unauthorized data from OpenAI [4, 6, 7]. The market may reassess chipmakers if there is greater efficiency related to AI [8].
• Job cuts: It is possible that Meta may announce job cuts on their earnings call [9].

Specific companies to watch:

• ASML: ASML’s recent earnings exceeded expectations and its stock is surging [4, 8]. The company makes equipment for manufacturing chips, and their success is tied to the AI boom [4, 10].
• Microsoft: Microsoft is under investigation for whether individuals linked to Deepseek accessed a large amount of data from the OpenAI application program interface [4, 7, 11].
• Meta: Meta recently discussed spending $65 billion on AI projects and will have to justify this spending [1, 9]. The company may face questions about the potential ban of TikTok in the US, and whether Meta may bid for it [9]. The company may benefit from using generative AI in its advertising products [9].
• Tesla: Tesla’s core business is not showing growth, but the company does have a long-term vision of the future that investors are interested in [12]. The question for investors is whether the company can continue growth for 2025 [13].
• Apple: There are concerns about reduced iPhone sales and competition in China [11]. Some analysts believe that Apple was wise not to invest heavily in AI earlier, but there are questions around what they are planning to do now [12].
• Other companies: It is not just the earnings calls of the Magnificent Seven that matter, but also the earnings calls of other companies that are talking about AI and how they are deploying it [14].

In summary, tech earnings this week are not just about past performance but will provide key insights into the future of AI, its impact on company spending, and market valuations.

Federal Reserve Decision & Market Outlook

The Federal Reserve’s upcoming decision and subsequent press conference are major events that will be closely watched by the markets [1, 2]. Here’s a breakdown of what to expect and key themes to consider:

• Decision: The consensus is that the Federal Reserve will likely hold rates steady [2-4]. This would be the first interest-rate decision under the new Trump administration [4]. The big question is whether this will be a skip or a pause [2, 4-6].
• A skip implies a downward trajectory for interest rates [5].
• A pause suggests the Fed is uncertain and might be done with rate hikes, but doesn’t signal any future cuts [4, 5].
• Chairman Powell’s Press Conference:
• The press conference is anticipated to be “incredibly boring” with Chairman Powell trying to say as little as possible to avoid any market disruption or provoke the White House [2, 4].
• He is expected to stick to the script of being data-driven [7].
• He is likely to avoid discussing the White House, tariffs, debts, or deficits [7].
• The objective is to avoid stirring up any news or speculation [4].
• The Fed may be challenged on whether the current decision is a skip or a pause [6].
• Divergent Views: There are differing opinions among Fed members, with some suggesting that the disinflationary process may have stalled [4]. This divergence could make the decision-making less clear [8].
• Key Factors Influencing the Fed’s Decision:
• Inflation: The Fed’s primary focus is on managing inflation [8]. They are monitoring whether the disinflationary process has slowed [4].
• Labor Market: The Fed is also watching the labor market, which has been a concern [9, 10]. The Fed was worried about the labor market cooling rapidly, but employment growth has been solid [11, 12].
• Policy Uncertainty: The Federal Reserve is assessing President Trump’s policies, with each member having a different take on the policies’ potential impact [3]. The long-term implications of these policies and their influence on the economy are uncertain [3, 7, 13]. This uncertainty is a key factor influencing the bond market [7, 13].
• Data Dependence: There is a concern that the Fed is being too data-dependent, which could confuse their analysis, communication, and approach [4, 14].
• Market Reaction: The market is anticipating three rate cuts, while others believe disinflation will continue [6]. Any indication that the Fed might not cut rates could lead to a “massive risk-off event” in the market [2]. If the Fed indicates they are done with rate hikes, there could be a substantial market reaction [6, 15].
• Impact of Tariffs: The Fed will have to consider the potential economic ramifications of tariffs [2]. Some Fed members believe tariffs will be disinflationary and not interfere with the downward trend in rates, while others think differently [3].
• Balance Sheet: The Fed is expected to stop quantitative tightening (QT) sometime this year, but they have not given any clues about how and when [9]. This could be a potential area for news out of the meeting [9].
• Relationship with the White House: The Fed is trying to navigate its relationship with the White House and avoid any conflict or tension [3]. There is an awareness that the President believes that interest rates should be much lower [3].

In summary, the Fed’s decision today is likely to be a pause, but the key takeaway will be the signals it sends about future policy. The press conference will be closely scrutinized for any hints about the Fed’s direction. The market is particularly sensitive to changes in bond yields and potential policy changes, making this a significant day for investors [7, 13].

Impending Trade Tariffs and Market Volatility

Trade tariffs are a significant topic of discussion, particularly with the upcoming deadline and potential implications for various sectors [1, 2]. Here’s an overview of the key points regarding trade tariffs from the sources:

Current Situation:

• There is a looming tariff deadline set for this Saturday, with President Trump considering tariffs on goods from Canada and Mexico, as well as China [2, 3].
• The tariffs being considered are as high as 25% on goods from Mexico and Canada [2].
• There is still a possibility of 10% tariffs on Chinese goods [2, 4].
• These tariffs are primarily aimed at addressing illegal border crossings and the flow of fentanyl [2].
• The President has made it clear he expects every nation to cooperate with the repatriation of their citizens [2].

Potential Impacts and Reactions:

• Retaliation: There is a strong possibility of retaliatory tariffs from Canada and Mexico, and potentially China [5, 6]. Canada has publicly discussed potential retaliation [6].
• Industries Affected:The automobile industry is expected to be heavily impacted if tariffs are implemented on goods from Mexico [7].
• Other sectors like steel, aluminum, and copper may also see tariffs, potentially affecting military and defense spending [8].
• The energy sector could be affected, especially if Canada retaliates on oil imports to the U.S [5].
• Market Volatility: The market is likely to react to any news of tariffs, and there is a risk of significant market moves if tariffs are implemented [9, 10].
• The market seems to be waiting to see how this plays out, rather than pricing in the tariffs [11].
• Supply Chains: The tariffs could lead to changes in supply chains [12].
• Importers: Importers may get a 90-day ramp-up period before tariffs go into effect [5].
• Negotiating Tool: Tariffs could be used as a negotiating tool to bring Canada and Mexico to the table to renegotiate the USMCA [2].
• Economic Ramifications: There is some debate about whether tariffs will be inflationary or disinflationary [10, 13].

Trump Administration’s Stance:

• The President is taking a hard stance on trade, and his administration views trade deficits as a problem to be addressed [6, 14].
• Trump is not expected to back down once tariffs are implemented [6].
• The administration is reviewing the Phase I trade deal with China, and further negotiations are possible [4].
• The President believes in using tariffs as leverage in negotiations [4, 6].
• The President wants to ensure that trade is fair [6].
• He has directed the USTR to review the Phase I deal with China [4].

Other Factors:

• Policy Uncertainty: The uncertainty surrounding the implementation and impact of tariffs is a major factor in market volatility [13, 15].
• Front-Loading: There are some suggestions that companies are trying to front-load orders ahead of potential tariffs [14].
• Business Community: The business community is on edge, as there is no clarity yet on how these tariffs will be implemented [16]. Companies are advised to understand their supply chains and have alternatives [16].
• Congress: Congress may also play a role in tariffs, potentially giving the President more authority [16].

Overall: The potential for tariffs is creating significant uncertainty and volatility in the market [10, 13, 17]. The actual implementation and impact of these tariffs remains to be seen, but the market is bracing for a potentially turbulent period, especially with the possibility of retaliatory tariffs from affected countries [6].

AI Competition: Deepseek, OpenAI, and the Future of Tech

The sources discuss several aspects of AI competition, including the emergence of new players, concerns about data usage, and the impact on established tech companies.

Key Players and Developments:

• Deepseek: This Chinese AI startup has emerged as a significant competitor, prompting concerns about technology valuations and competition [1]. There are questions surrounding how they developed their technology, specifically whether they obtained unauthorized data from OpenAI [2-7]. There is evidence suggesting that Deepseek may have leaned on the output of OpenAI’s models to develop its own technology, a process called “distillation” [3, 4, 6, 7]. Microsoft observed individuals linked to Deepseek taking large amounts of data using the OpenAI application program interface [3, 4, 7]. The US Navy has been instructed not to use AI from Deepseek, due to security and ethical concerns associated with the origin and usage of the technology [8].
• OpenAI: This company is investigating whether Deepseek obtained unauthorized data and is trying to prevent the use of their models through IP protection [2, 4].
• Alibaba: This Chinese tech company has released a new version of its AI model, claiming it outperforms OpenAI, Microsoft, and Deepseek. They are also cutting prices to win over more users [7, 9, 10].
• Microsoft: Microsoft is also under investigation, as it is exploring whether individuals linked to Deepseek obtained unauthorized data through its OpenAI application program interface [2-4, 7].
• Established Tech Companies: The “Magnificent Seven” (including companies like Meta, Microsoft, and Apple) are facing challenges from new competitors in the AI space [1, 11, 12]. There is a question of whether these companies will maintain their dominance or if new players will emerge as leaders [1, 11, 13, 14].

Impact on the Market:

• Reassessment of Chipmakers: The emergence of Deepseek has caused a reassessment of chipmakers and whether the market will see greater efficiency gains through AI, or if there will be continued demand for chips [15].
• Valuation Concerns: There is concern that the intense competition in AI could put downward pressure on valuations of tech companies, especially those with high capital expenditures [1, 2]. The market may react violently to less than perfect or very good news from the tech companies [1, 2, 13].
• Capital Expenditure (CAPEX): Companies like Meta are facing questions about their high CAPEX spend on AI and data centers, with questions about whether the spending is necessary [11, 13, 16]. There is a focus on whether companies can achieve efficiencies using software engineering or open-source technology, rather than simply spending more on infrastructure [13].
• Monetization: There are questions around whether these companies are effectively monetizing their AI investments [3, 13].
• Open Source vs Closed Source: There is a discussion about open source AI models versus closed source models and how that will impact competition in the market [4, 7, 13].

Strategic Moves in Response to AI Competition:

• Lobbying Efforts: There are reports that tech leaders are increasing their presence in Washington D.C. to potentially gain a regulatory advantage [17].
• Focus on AI Adoption: Companies are shifting from being “enablers” of AI to “adopters,” who are using the technology to drive efficiency and effectiveness [10, 14]. This includes developing tools that are using generative AI [14].
• Efficiency Gains: There is a focus on efficiency gains from adopting AI technologies [10]. Some companies are reporting significant improvements in employee efficiency on the back of AI tools [10, 18].

Overall:

The AI landscape is becoming increasingly competitive, with new players challenging the established tech giants. This competition has sparked concerns about valuations, data security, and the long-term implications of AI development. The market is closely watching how companies are adapting and implementing AI technologies, as well as if they are able to monetize it effectively. There is a sense that a turning point in AI adoption may have been reached, and that the market may start to focus on companies that are adopters of AI to improve efficiency and effectiveness [10].

American Tech Exceptionalism: Innovation, Competition, and the Future

The concept of “U.S. exceptionalism” is discussed in the sources, particularly in the context of technology innovation and the dominance of U.S. companies in the global market [1, 2]. Here’s a breakdown of how the sources address this idea:

• Tech Innovation as a Driver:
• The sources suggest that U.S. exceptionalism is primarily driven by technological innovation, particularly in the tech sector [1, 2].
• The idea that the U.S. is the greatest innovator in the world is seen as a key component of its exceptionalism [1].
• The high-earning tech companies in America are viewed as evidence of this exceptionalism [2].
• This includes the dominance of U.S. companies in areas like social media, smartphones, and software [1].
• Market Leadership:
• U.S. companies, particularly the “Magnificent Seven,” are described as leaders in their respective fields and are not considered “obvious losers” [1, 2].
• The top tech companies have access to software and interaction with clients, which helps sustain their high volume [2].
• These companies’ ability to generate high earnings is a significant factor contributing to this perception of exceptionalism [1, 2].
• Challenges to U.S. Dominance:
• While U.S. companies are currently dominant, the sources also acknowledge that other companies may challenge their dominance [1].
• The emergence of AI competitors like Deepseek from China raises questions about the long-term sustainability of U.S. tech dominance [1].
• The sources also note that there is competition in the AI market, not only between the US and China, but also between open source and closed source technology [3, 4].
• The sources also raise questions about whether the AI sector could lead to a situation in which there are more “adopters” of AI tech than “enablers” of it. [5, 6].
• Financial Implications:
• The idea of U.S. exceptionalism in the tech sector has driven significant investment, leading to high valuations for many tech companies [7-9].
• However, there is increasing scrutiny about whether the current valuations of tech companies are justified, especially given the high capital expenditures required for AI development and data centers [5, 10].
• The sources point out that market sentiment and willingness to pay a premium for certain tech stocks are also being questioned [11].
• Geopolitical Factors:
• There are discussions about how U.S. companies may be affected by a new political administration and the associated changes in regulations, tariffs, and trade [12-14].
• There are concerns about the potential impact of U.S. trade policies on international companies, and the risk of inflation [13, 14].
• The U.S. is also trying to rebuild some of its domestic supply chains for metals to meet the increasing demand [15].
• AI Development and Competition:
• There is a debate about how AI innovation is affecting the exceptionalism of U.S. tech companies, with some experts saying that the innovation power of China is “tremendous” [6, 14].
• The competition in AI is putting pressure on U.S. companies to justify their capital spending and demonstrate efficiency gains from AI [5, 6, 10].

Overall, the sources present a nuanced view of U.S. exceptionalism. While the U.S. is considered a leader in tech innovation, the sources acknowledge that this dominance is not guaranteed. Competition from other countries, challenges in AI development, and changes in political and economic policies could impact the long-term sustainability of U.S. exceptionalism.

By Amjad Izhar
Contact: amjad.izhar@gmail.com
https://amjadizhar.blog

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