Equity markets pushed higher last week on the back of decent earnings and President Trump exercising some refrain on the tariff front during his first week in office.  Time will tell whether tariffs will be used as a negotiating scalpel or a hammer to restructure the existing world order.   Without question, investors prefer the former to the latter, and as such, the Dow and S&P 500 registered new record highs last week.  Interest rates were little changed on the week as the dollar experienced a rare but meaningful decline -1.75%.  This helped push gold back up near record highs as it gained +2.5% on the week.

This is going to be one of the shorter notes I’ve ever put out because I don’t have much new or insightful to write about.  Furthermore, this week, we have a Fed meeting concluding on Wednesday and an avalanche of earnings reports, including several of the Mag7, which will give me a lot more to write about next week. 

One topic that is worthy of discussion and one all investors will be spending a lot of time trying to understand the implications of is the release of China’s AI startup DeepSeek, which just disrupted the A.I. ecosystem as we knew it.  This is a cutting-edge, large language, open-source R1-reasoning model that reportedly is faster, more efficient, and more cost-effective than models introduced by the likes of America’s MegaCap Tech companies.  Competition can be a marvelous thing, but not for the U.S. stock market, where investors are loaded lock, stock, and barrel to the A.I. investment theme and all the tertiary industries it spills over into. Below is a snapshot of an A.I. theme basket I track where the daily declines as of 1:30 pm EST range from negative 10% to -38%.  We’re not talking about a group of penny stocks here with Nvidia ($3 trillion market cap) – 17%, Taiwan Semiconductor ($1.15 trillion market cap) –15%, Eaton ($150 billion market cap) –16%, and Constellation Energy ($100 billion) –20%.

Fortunately, there are plenty of areas within the market that didn’t benefit from the A.I. momentum train on the upside and, therefore, aren’t affected by this current unwind, but this development is forcing investors to question the market position of all the MegaCap Tech names and the entire A.I. supply chain.  Moreover, confusion and uncertainty are running high, which only adds to the ‘sell first, ask questions later’ price action we’re seeing in some high-quality companies in today’s tape.        

I’m not going to try and play the role of a tech/A.I. expert on the long-term viability and potential A.I. paradigm shift this presents for equities and/or the economy.  But the structural dynamics underlying U.S. equity markets as they exist today and the mechanical nature in which algorithmic trading functions, creates the potential kinetic energy to orchestrate an impactful rug-pull for the S&P 500. 

Keep in mind that nearly 35% of the S&P 500 and 49% of the Nasdaq is concentrated in 8 companies, all tied in some shape or form to the Technology sector and all viewed by investors as being drivers or beneficiaries of the oncoming A.I. renaissance. These companies are also the driving force behind the “U.S. Exceptionalism” positioning by investors around the globe, as innovation is a core component of that view. 

If you’re asking me if this development worries me – the answer is yes.  Not nearly as much or in the same fashion that an economic recession would – that would be way worse – but there is a lot of market cap tied to this theme where cutting a leg or two out from underneath it is worthy of concern.  It’s definitely not worthy of panic and will likely create some selective opportunities, but this should serve as a valuable lesson to momentum investors – that knife cuts both ways. 

As for some final thoughts on markets, expectations are pretty low heading into this week’s Fed meeting, where Fed fund futures have repriced for a little less than two cuts this year. I think it's important for markets that Powell retain a loosening bias. The uncertainty over trade, tariffs, fiscal policy, moderating liquidity, stretched equity valuations, and slowing economic growth is already a full plate for equity markets.  I doubt it can handle a Fed piling on with a tightening bias. 

For the S&P 500, I have an open mind in terms of thinking the S&P 500 will trade as high as 6,600 this year and as low as 5,000.  So, at 6,000 on the S&P 500, I’d consider myself indifferent – neither bullish nor bearish.  If economic growth holds up, inflation remains somewhat tame, interest rates stay range bound (10-year T-note doesn’t break forcefully above 5.0%), the labor market stays firm, and the new administration executes its agenda (somewhat as planned), then I’d be a willing buyer of more equities as we get below 5,500 and a willing seller above 6,300.

As for the bond market, I’m a willing buyer of longer-duration bonds if/when the yield on the 10-year T-note pushes above 4.75%.  Otherwise, I’m content rolling over paper on the short-end and holding select fixed-income ETFs with exposure to areas of the bond market I think are attractive (Investment grade CLOs, new-issue mortgage bonds, & emerging market sovereign debt).  Keep in mind that the 4.75% - 4.85% yield level on the 10-year T-note is an area that has given the equity market fits in the past, so I would expect stock market weakness if/when we get there.  Moreover, the drivers for why rates are pushing higher will matter, so any move higher in yields should not be viewed in a vacuum. 

Lastly, I’d be interested in dipping a toe into Bitcoin if it traded below $85,000 and continue to think all investment portfolios benefit from a strategic allocation to gold.  I’ve said it before, and it bears repeating: diversification is no longer a dirty fifteen-letter word.  Most investors can achieve their long-term financial goals with a combination of assets given the current opportunity set across the equity, fixed income, and commodities markets.  Gone are the days when you had to rely solely on equities to get to the promised land.       

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