Proflex Market Update - Wk 05

AI stocks in the U.S. have come under renewed pressure due to the emergence of DeepSeek, a Chinese artificial intelligence company founded in 2023 by entrepreneur Liang Wenfeng in Hangzhou, China.

DeepSeek has developed advanced AI models that rival those of leading U.S. tech giants, raising concerns about the continued dominance of these companies in the AI sector.

DeepSeek’s Advancements:

• The company has introduced the DeepSeek R1 model, which has demonstrated capabilities comparable to OpenAI’s models. Notably, DeepSeek achieved this with a development cost of under $6 million, utilizing efficient training methods without relying on the most advanced chips.

2. Market Impact:

• The launch of DeepSeek’s open-source AI model has led to a significant sell-off in U.S. tech stocks, with major companies like NVIDIA, Microsoft, Meta, and Tesla experiencing substantial declines. Investors are reassessing the competitive landscape as DeepSeek’s advancements challenge the perceived technological lead of U.S. firms.

3. Outlook:

• While DeepSeek’s rise introduces new competition, the long-term opportunity in AI remains robust. Investors should monitor developments closely, as the market may present attractive entry points for high-conviction plays in the AI space.

Wider Market Liquidations: Ripple Effects Across Stocks and Crypto

The pressure on AI stocks has extended beyond the tech sector, triggering a wave of liquidations across major funds invested in growth assets. This has created a broader correction in both stock and crypto markets, as leveraged positions face unwinding.

1. Fund Pressures:

• Hedge funds and institutional investors heavily weighted in AI and tech are facing significant losses, prompting asset sales across portfolios.

• The ripple effect is evident in the S&P 500, which has seen declines across sectors despite broader economic resilience.

2. Crypto Market Volatility:

• Cryptocurrencies have also come under pressure, as liquidations in speculative assets hit Bitcoin and altcoins alike. Bitcoin briefly fell below key support levels but has since shown signs of stabilization.

• Sentiment remains fragile, with investors closely watching institutional flows for signs of recovery.

Falling Bond Yields: Relief Amid Easing Inflation Concerns

Bond markets have offered a glimmer of relief as yields continue to decline, reflecting fading concerns over persistent inflation.

1. 10-Year Treasury Yield:

• The 10-year Treasury yield has retreated from recent highs, easing pressure on valuations for rate-sensitive sectors like tech and real estate. Declining yields are also reducing borrowing costs, which could support economic activity in the coming months.

2. Inflation Trends:

• Recent data suggests inflationary pressures are moderating, with core inflation metrics stabilizing and energy prices cooling after a spike earlier in the year.

3. Investment Implications:

• Falling yields make income-generating assets like bonds more attractive for conservative portfolios. For equities, the reduced cost of capital is a tailwind, particularly for growth-oriented companies.

FOMC Meeting Ahead: Rate Cuts Likely on Pause

The Federal Reserve’s upcoming FOMC meeting is set to take center stage this week, with market participants widely expecting no changes to the current rate path. While rate cuts remain on the table for 2025, the Fed appears poised to adopt a “wait-and-see” approach for now.

1. Key Expectations:

• The Fed is likely to reiterate its commitment to monitoring data closely, emphasizing a cautious stance amid lingering uncertainties. No additional rate cuts are expected this week, but markets will parse the Fed’s commentary for clues about the trajectory of monetary policy next year.

2. Market Implications:

• A dovish tone from the Fed could provide a boost to equities, particularly as investors recalibrate expectations for economic growth and inflation. We had seen a fairly hawkish Fed since Trump election and now that we are seeing some of the tariffs talks at more moderate levels, it will be interesting to see FOMC stance.

Opportunities in a Changing World

The market is at a crossroads, grappling with challenges in the AI trade, broader liquidations, and a shifting monetary policy landscape. However, declining bond yields and easing inflation concerns offer reasons for cautious optimism.

We shared our insights on today's AI meltdown to All-Access Subscribers with specific advice on how to deal with current situation. We will continue to provide our insights as we enter choppy markets after 2 great years of stock market performance.

Best regards,

Raman Bindlish

Editor-in-Chief,

Proflex Finance

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