Knowledge Center
Market Currents – 2/21/25
- January’s Market Movements: Steady with a Hint of Caution. The start of the year brought fresh policy priorities with the inauguration of a new U.S. administration, while the AI landscape saw disruption from a Chinese startup making waves with low-cost advancements in language models. Despite these developments, equity markets remained steady. U.S. stocks rebounded from December’s pullback, with gains across both developed and emerging markets. Value stocks led the way, outpacing growth for the first time in five months. Treasury yields finished the month mostly unchanged, even as inflation concerns and Fed policy speculation lingered. As February unfolds, markets are taking a slightly more measured stance amid evolving policy discussions, trade developments, and government spending shifts.
- Policy and Geopolitical Uncertainty Keep Markets on Alert. Ongoing debates over trade policy and government spending continue to shape market sentiment. The potential for new tariffs and changes to trade agreements is creating uncertainty for businesses reliant on global supply chains. At the same time, discussions over government spending and potential budget adjustments raise questions about broader economic implications. Geopolitical tensions – including the ongoing Russia-Ukraine conflict, developments in the Middle East, and strained U.S.-China relations – also remain a watchpoint for investors. While uncertainty is nothing new, the current lack of clarity has led to a more cautious, wait-and-see approach in the markets.
- Sticky Inflation Tempers Rate Cut Hopes. February’s surprisingly hot inflation data, coupled with the growing possibility of new tariffs, forced markets to scale back expectations for Federal Reserve rate cuts in 2025. While inflation has eased from its 2022-2023 peak, it remains more persistent than anticipated, staying well above the Fed’s 2% target. The prospect of tariffs has added to concerns about rising costs, further dampening hopes for early cuts. Markets are now bracing for fewer and later rate reductions in 2025, with the “higher for longer” rate narrative back in focus.
- The “Deepseek Effect” Ripples Through AI Stocks. Deepseek shook up the AI space by reportedly delivering output comparable to top large language models like ChatGPT – but at a fraction of the cost. This has sparked questions about cost competitiveness, and whether U.S. AI leaders are overspending on model development and infrastructure. Deepseek is unlikely to gain meaningful traction in the U.S, given its China roots and potential regulatory hurdles. Nonetheless, its emergence has heightened investor scrutiny of AI business models, with a growing focus on profitability and long-term sustainability.
- Market Outlook: Balanced but Watchful. We see a balanced outlook for 2025, with long-term technology trends continuing to drive innovation and growth. However, shifting Fed expectations, potential tariffs, government budget changes, and evolving trade policies remain key considerations. Rather than speculating or reacting to short-term headlines or market moves, we remain focused on adapting as new facts emerge. Given stretched valuations particularly in some high-flying tech names, we maintain a below-market exposure to these areas while favoring underappreciated companies with strong fundamentals and more reasonable pricing.