Stock futures plummeted on Monday amid fears of an AI stock bubble bursting, triggered by the emergence of Chinese startup DeepSeek, which reportedly developed a competitive AI model at a significantly lower cost. This led to substantial premarket losses for major tech companies: Nvidia fell by 12%, Broadcom by 13%, and AMD by 6%. Microsoft saw a 7% decline, while Palantir dropped 8%. Other tech giants, including Amazon and Meta Platforms, also experienced losses exceeding 4% each. Adding to the market’s anxiety, the Federal Reserve is set to hold its first policy meeting of the year on Wednesday, with Fed funds futures indicating a more than 99% probability that interest rates will remain unchanged, according to CMEGroup’s FedWatch Tool.

European markets started the week on a downbeat note, reflecting investor caution ahead of a busy earnings season and the European Central Bank’s upcoming interest rate decision. This negative sentiment was echoed in Asian markets and Wall Street futures, driven by weak tech performance. The rise of Chinese AI startup DeepSeek has raised concerns about the global leadership of established U.S. tech giants in the AI sector. Consequently, European chipmakers ASML and ASM International saw significant declines in their share prices, dropping 8.4% and 11.6%, respectively.

In January, China’s factory activity unexpectedly contracted, with the official purchasing managers’ index (PMI) falling to 49.1, below Reuters’ estimate of 50.1. Despite an 11% year-over-year increase in industrial profits in December, annual profits declined for the third consecutive year. In response to its struggling stock market, China introduced new initiatives to promote the growth of index investment products. Meanwhile, markets in Australia, Taiwan, and South Korea were closed for holidays. Hong Kong’s Hang Seng index saw a modest rise of 0.51%, while the mainland CSI 300 dipped by 0.41%. In Japan, the Nikkei 225 fell by 0.92%, but the Topix managed a slight gain of 0.26%.

Economic Calendar

Earnings Calendar

Notable reports for Monday before the bell include T, BOH, HOPE, & SOFI. After the bell reports include ARE, BRO, CR, ELS, GGG, NUE, PCH, SANM, SBCF, TRNS, WRB, & WAL.

News & Technicals’

U.S. technology firms experienced significant declines in premarket trading, driven by concerns over the competitive threat posed by Chinese startup DeepSeek. This company recently launched a free, open-source large-language model, developed in just two months for under $6 million, a fraction of the cost incurred by Western counterparts. Adding to the turmoil, DeepSeek’s new reasoning model reportedly outperformed OpenAI’s latest in several third-party tests. These developments have sparked a global sell-off and raised questions about the substantial investments big tech companies have been making in AI models and data centers.

On Sunday, the U.S. and Colombia averted a potential trade war after Colombia agreed to accept military aircraft carrying deported migrants. This decision came after U.S. President Donald Trump threatened tariffs and sanctions against Colombia for initially refusing these flights as part of his broader immigration crackdown. In a late Sunday statement, the White House confirmed that Colombia had accepted all of Trump’s terms, including the unrestricted acceptance of deported migrants on U.S. military aircraft, thus avoiding the imposition of the threatened penalties.

U.S. Treasury yields declined on Monday as investors anticipated the Federal Reserve’s upcoming meeting and awaited key inflation data. This week is expected to be eventful, with the Fed scheduled to announce its monetary policy decision on Wednesday. Newly inaugurated President Donald Trump has added pressure on the Fed, expressing his expectation for lower interest rates during a keynote address at the World Economic Forum in Davos, Switzerland, last week. Despite this, traders are pricing in a more than 99% probability that the Fed will keep interest rates unchanged, according to the CME Group’s FedWatch tool. In its December meeting, the Fed projected only two interest rate cuts for 2025.

Investors are eagerly awaiting the release of the personal consumption expenditures price index for December on Friday, the Federal Reserve’s preferred measure of inflation, which will provide new insights into the health of the U.S. economy. This week is also significant for earnings reports, with four of the “Magnificent Seven” companies—Meta, Apple, Microsoft, and Tesla—set to announce their results. Additionally, major companies like Starbucks, Boeing, General Motors, Visa, and Exxon will be reporting their earnings, making it a crucial period for market watchers.

This morning some big questions emerged about tech US dominance and one of those questions is the AI stock bubble bursting?  Clearly, we don’t know enough yet to answer that question, so the market is filled with uncertainty this morning.  I suspect with will only add to the volatility of the pending beg tech reports bringing a new level of scrutiny to tech stock valuations.  Try not to panic, watch for big point whipsaws that could be bullish or bearish as the market searches for clarity in the days ahead.

Trade Wisely,

Doug