Welcome to your February monthly market outlook from atomos
Technology stocks suffered a setback last week as a Chinese challenger burst onto the artificial intelligence (AI) scene. Startup company DeepSeek made headlines by overtaking OpenAI’s ChatGPT as the most downloaded on the Apple app store. The news rattled markets, with share prices of AI-related stocks dropping sharply, especially Nvidia which plunged 17% in a day to lose $589bn of its market capitalisation.
DeepSeek's potentially cost-effective and high-performing AI models are posing a challenge to the extensive infrastructure investments of large technology firms. OpenAI has accused DeepSeek of copying its technology in order to create the rival model.
As strong believers in the ongoing potential of the tech and AI story, there are a couple of main reasons that events of last week are not shaking our confidence in these stocks. One, it is very early days for DeepSeek, so we don’t think we can yet accurately judge the potential impact on future AI infrastructure needs or US economic growth. Two, while market movements on individual days last week were meaningful, particularly for some individual stocks, equities up until this point had enjoyed a positive start to the year. Even with the falls seen on 28 January, around 2% on the day for American equities, this only takes us back to the market level of around 10 days prior.
That being said, one of the key risks to our central positive outlook for (particularly US) equities for 2025 is the high level of concentration of markets in the ‘Magnificent Seven’ technology stocks, combined with high valuations of these companies. This group of stocks, which includes Nvidia, Meta and Apple, have been strong drivers of equity markets for many months. This presents the risk that equity markets might fall due to stock- or sector- specific events, even if our positive overall growth outlook for the US proves to be correct. The DeepSeek news and associated volatility is a prime example this. We are continually monitoring developments and risks to US growth, and the impact these may have to our outlook.
Trump upends the world trade order as he takes office
President Trump kicked off his second term in the White House by sparking a trade war. Over the weekend, he ordered tariffs of 25% on a number of exports from Canada and Mexico to the US. Shortly after unveiling these new tariffs, Trump said he would pause them for 30 days as he entered talks with the two nations on border security and drug trafficking. He had earlier reaffirmed his intention to use tariffs as an economic tool and as leverage.
Trump also announced a 10% tariff on imports from China which is still going ahead. China has already hit back with its own retaliatory 15% tariff on US coal and natural gas, and 10% on crude oil, agricultural machinery and large-engine cars imported from the US. The 10% tariff on Chinese goods is below the 20% tariff we had assumed as our base case scenario, and we had also factored in retaliation from China. So, while it may seem strange, Trump's announcements are actually a positive surprise compared to our forecasts.
From an economic perspective, we expect the US tariffs on China to add 0.2% to US inflation and have a minimal effect on US GDP. This is well within the range of plausible scenarios we had set out, and which we had already accounted for in our investment decisions. We have not materially changed our central outlook for 2025 in response to Trump's latest announcements.
Trump also signed a flurry of executive orders in a busy first week following the inauguration on 20 January. While many of these actions might face legal challenges, they set the stage for his administration's priorities.
The announcements covered various topics, with a strong focus on immigration and energy. Most of these actions were expected, so there were no major surprises. Scanning the price action in financial markets since 20 January:
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Looking at the currencies of the countries at the centre of the new trade policies, the US dollar has weakened against the Chinese yuan, and is roughly flat against the Mexican peso, and Canadian dollar.
It is still too early to know for certain how these policy changes will impact economic growth and inflation, and the specifics of these executive orders are yet to be fully understood.
Regulation: Another key policy area for Trump
Climate-related policies: President Trump's executive orders marked a shift away from promoting electric vehicles and renewable energy, instead prioritising fossil fuels and reducing regulations for gas-powered vehicles. While these policies set a clear direction for US policy under the Trump administration, their impact on financial markets is expected to be limited.
Energy: Trump signed several orders to try to boost US oil and gas production, in line with his “drill, baby, drill” rhetoric on energy.
The recent announcements were largely anticipated. However, it remains to be seen how effective the new executive orders will be in boosting US oil and gas production, given that:
US energy stocks declined over the week.
Cryptocurrencies: President Trump signed the ‘Strengthening American Leadership in Digital Financial Technology’ executive order to promote the domestic digital asset industry.
It will take time for federal agencies to establish the legal and regulatory frameworks needed to support the cryptocurrency sector. However, the executive order clearly signals the President's pro-crypto stance. Bitcoin has fallen since 20 January but has still risen c.45% since President Trump’s election victory in November.
Where next for the UK economy?
Back on home soil, we have been thinking about what 2025 may hold for the UK. Our forecast is for economic growth to accelerate to moderate levels in the first half of the year, supported by monetary easing and higher government spending following the autumn Budget.
Growth may fade a little in the second half of the year as the positive impact from higher government spending begins to slow. While 2024 was a year of belt-tightening, we think real wage growth should stay positive enough to support household spending growth over the year.
We expect underlying goods, services, and wage inflation pressures to ease. However, the price effects from the budget are likely to keep Consumer Price Index (CPI) inflation at or a little above its current 2.5% level over 2025. Given these conditions, the Bank of England will likely cut rates by 0.25% in each quarter of 2025.
UK government bonds
Global government bond yields have been moving in a synchronised way, led by US government bond yields. US bond yields have fallen materially from a near peak in January, and UK government bonds (gilts) have followed this trend.
These moves have been largely driven by a calming in bond markets through economic data flow, specifically weaker-than-expected inflation.
There are several economic and political events in the coming weeks that could impact global bond sentiment in either direction, not least new US policies from the Trump administration, especially in relation to trade and tariffs, which could potentially be inflationary. We will be keeping a close eye on developments in the coming months.
Sector in focus: Consumer discretionary
The consumer discretionary sector consists of non-essential goods and services that consumers can reduce, substitute, or do without during challenging times. This includes cars, household appliances, luxury goods, specialty products and leisure activities. The sector typically performs well during periods of good economic growth and rising consumer confidence, as people are more willing to spend on non-essential items.
Over the last year, the consumer discretionary sector outperformed the MSCI World Index and consumer staples sector. The favourable economic conditions of 2024 - marked by strong growth, rising productivity, falling inflation, and Federal Reserve rate cuts - provided a solid foundation for the consumer discretionary sector. Steady employment gains and real wage growth enhanced consumers' purchasing power and confidence, while lower inflation preserved their ability to spend on non-essential goods.
Looking ahead, we think the US consumer discretionary sector is well-positioned for growth, supported by favourable fiscal and monetary policy.
If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us
Content correct as of publication on 5th February 2025
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.