2025 Starts with Major Market Shifts

The Good News: Markets saw early optimism last week as U.S. President Trump refrained from imposing new tariffs on key trading partners during his first days in office. However, uncertainty lingers as his frequent threats of tariffs keep markets on edge.

The Bad News: China’s AI start-up DeepSeek shook the tech industry with the announcement of groundbreaking results. DeepSeek claims its AI can match the performance of giants like ChatGPT and Gemini while operating on less expensive chips with lower power consumption—and it’s free.

If true, this development could have immediate ramifications. The high premiums on Nvidia’s cutting-edge chips may be under threat, and the profitability of Alphabet and Microsoft’s AI initiatives could be questioned. Additionally, energy companies may face reduced valuations as projections for AI-related power demands are re-evaluated. This marks a potential new era of tech disruption.

While these disruptions spell challenges for existing AI players, they could be a boon for emerging AI users and developers. Much like the commoditization of website development skills during the late 1990s tech boom, cheaper and more accessible AI technology could usher in broader adoption. Historically, even as early internet companies lost their premium valuations, the internet itself continued to thrive, fueling the digital revolution. Similarly, cheaper AI is inherently deflationary, paving the way for transformative growth.

From a short-term market perspective, however, the problem lies in identifying future winners. Many current AI leaders appear most at risk of disruption, while potential winners are either unlisted or remain hard to pinpoint. Notably, Meta, Apple, and Salesforce have so far benefited as major AI adopters. Overall, the continued dominance of the tech sector—and even the U.S. market—faces growing uncertainty.

That said, provided the broader macroeconomic environment remains favorable, this shift need not signal the end of the equity bull market. Instead, it could prompt a rotation within technology and a pivot toward non-tech sectors. If this truly signals the end of U.S. tech exceptionalism and heralds cheaper innovation, it could also put downward pressure on the U.S. dollar and bond yields.

Australian Market Outlook

Early morning trading shows the S&P/ASX 200 up 1% over the past week, maintaining its resilience amid the global volatility. This aligns with the view that the DeepSeek disruption may drive sector rotation rather than an overall market decline.

Domestically, there was little notable data last week, but the focus now shifts to tomorrow’s Q4 CPI report. The market expects trimmed mean inflation to ease from 3.5% to 3.3%, slightly below the RBA’s November forecast of 3.4%.

Will this be enough for a February rate cut? While a 3.3% result would be encouraging, it leaves the decision finely balanced. Last Friday, only 40% of surveyed economists predicted a rate cut, but market pricing suggests an 80% chance.

Wishing you a great week ahead!

Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial

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Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.