Market Note – January 28, 2025

By Hightower Great Lakes on January 28, 2025

Comments on DeepSeek

Markets are selling off Monday regarding fears that China’s artificial intelligence (AI) startup DeepSeek may challenge the Magnificent 7’s race for AI.

DeepSeek is a two-year-old AI research and development company operated by High-Flyer, a leading Chinese quantitative fund. The company’s most recent AI model rose to the top of the App Store over the weekend and has shown impressive feats given it was developed with less than $10 million.

Meta (META), Alphabet (GOOGL), and Microsoft’s (MSFT) multi-billion-dollar investments are now coming into question given the efficiency DeepSeek has shown at a fraction of the cost.

But many questions remain unanswered. We are confident that AI is in the early innings of a new revolution in technology and is here to stay; the total addressable market for AI is expected to be north of $1 trillion by 2030, and with AI comes data centers, power demand, and grid enhancement.

There are currently ~5,000 data centers in the U.S., which is expected to grow to 10,000 within the next five years. Regarding the grid, 70% of electric transmission lines in the U.S. are over 25 years old, and the U.S. has not spent any incremental dollars on the grid in over 50 years. Advancements in AI will lead to improvements across many industries outside of technology.

It is understandable that hyperscalers and semiconductors will act in a “sell the news” fashion. These companies have had huge outperformance in the last two years and were waiting for a catalyst to slow down.

We own Amazon (AMZN), which is not just an AI play, but also e-commerce, cloud, consumer, and advertising. Infrastructure companies have double-digit backlogs that will not be met for several years, and we will be watching Eaton (ETN), GE Vernova (GEV), and Quanta Services (PWR) as the dust settles.

Market-Moving Data

Markets ended the third week of January, up 1.74% and 3.73% year-to-date. What looked like a choppy start to the year following December’s blow-out non-farm payroll report has since settled down with inflation data coming in cooler than expected.

Volatility (as measured by the VIX Index) is down more than 30% from the early January high, and market participation has greatly broadened.

Industrials and energy are leading all sectors up by nearly 7% YTD, followed by materials, financials, and utilities, all up over 5%, very encouraging. Healthcare, communication services, and technology follow, with consumer staples the only sector in the red.[1]

This rally across sectors has been attributable to better earnings growth, with earnings up 12.75% y/y in the fourth quarter. The financials sector has done very well, with a Q4 reported blended growth rate of 49.8% y/y thus far.

Merger and acquisition and investment banking fees, along with net interest income, have all surprised to the upside across many of the major banks. Commentary remains strong around the consumer and management teams greatly favor the outlook with the new administration, coming with less regulation, a steeper yield curve, and a better dealmaking environment.

The economy has continued on its solid pace led by retail sales, industrial production, and employment. Revenues are up mid-single digits and margins are poised for a record high this quarter. And amid nearly 7% mortgage rates, housing has been holding up.

Existing-Home Sales rose for the third month in a row and are now at the highest level since February 2024. Sales were up 9.3% y/y which was the highest since June 2021. We remain constructive on the housing market given 14 years of underproduction and the U.S. being over 5 million homes short.

Chart 1: Markets Have Had a Good Start to 2025[2]

Data Centers Are in Focus

Last week we learned about The Stargate Project – a new $500 billion initiative towards artificial intelligence (AI) infrastructure in the U.S., through partnerships with OpenAI, Oracle, and SoftBank.

The entity will be building data centers and the electricity generation needed to support AI. CEO of OpenAI, Sam Altman, stated that “this will be the most important project of this era”.[3]

A lot is still unknown about the project, but the data center theme got a lot larger last week. We think maintaining exposure to this theme is a must, and not just through technology, but through infrastructure, power, grid, and electrification companies.

GEV maintains exposure to the electrification side of data centers, and has a $119 billion backlog for projects with $2 billion of service upgrades from customers over the past year. In the most recent quarter, they reported record orders of $13.2 billion led by power and electrification.

Also, the company sees an opportunity to add 5 gigawatts of nuclear power by the end of the decade. As of today, there are 65 power plants in the U.S. using GEV technology, with more to come.

Fixed Income

On a holiday-shortened week, treasury yields opened higher after Inauguration Day but reversed later in the week on slightly softer jobs and PMI data, with the 2-, 10-, & 30-year yields lower by 2, 1, & 1 bps, respectively.

Still, given strong economic performance and a tight labor market, the market is anticipating a policy hold during Wednesday’s FOMC meeting for the first time since September, as the Fed remains in a wait-and-see approach this year.

Credit spreads were muted in investment grade and high yield, tightening 1 bp to +116 for investment grade and 2 bps to +294 bps for high yield, which is a record tight for the market.

Credit ratings deteriorated for the second week in a row as the main rating agencies issued 36 downgrades and 11 upgrades. Tax-exempt yields followed treasuries, with yields falling 1-2 bps across the curve.

The Week Ahead

Earnings – Monday: T, WRB; Tuesday: ARE, BA, BRO, FFIV, GM, IVZ, KMB, LMT, NUE, PCAR, RCL, RTX, SBUX, SYF, SYK, SYY; Wednesday: ADP, BXP, CB, CHRW, DHR, GD, GLW, IBM, LII, LRCX, LVS, META, MSCI, MSFT, NDAQ, NOW, NSC, OTIS, PKG, RJF, TMUS, TSLA, WDC; Thursday: AAPL, AJG, AMP, AOS, AVY, BX, CAH, CAT, CI, CMCSA, DECK, DGX, DOV, DOW, GEN, INTC, IP, KLAC, LHX, LUV, MA, MMC, MO, NOC, PH, PHM, RMD, ROP, SHW, TER, TMO, TSCO, TT, UPS, URI, V, VLO, WM; Friday: ABBV, AON, BEN, BKR, BR, CHD, CHTR, CL, CVX, EMN, ETN, GWW, HIG, LYB, PPG, PSX, WY, XOM.

Economics – Monday:  Building Permits, New Home Sales; Tuesday: Durable Orders, FHFA Home Price Index, Consumer Confidence; Wednesday: Wholesale Inventories, FOMC Meeting; Thursday: Continuing Jobless Claims, Preliminary Q4 GDP, Initial Claims, Pending Home Sales; Friday: PCE, Core PCE, Personal Income.

Return for Selected Indices^[4]

Click here to read last week’s Market Note (1/15).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

---

[1] Source: FactSet. As of January 24, 2025.

[2] Source: FactSet. As of January 26, 2025.

[3] Source: AP News. As of January 23, 2025.

[4] Source: Bloomberg. As of January 27, 2025.