Weekly Market Update: February 3, 2025
The Federal Open Market Committee (FOMC) held the federal funds rate in the range of 4.25% to 4.50% at its January meeting. This may prove to be the first in a series of interest-rate pauses, as we don’t expect the data-dependent central bank to be in a rush to cut rates with the pace of price growth still running above its comfort level and the labor market remaining tight.
This decision comes as President Trump urges the Federal Reserve to start cutting rates again. The central bank, which operates independently, will likely err on the side of caution, as the Trump Administration pushes a pro-growth agenda (i.e., lower taxes and regulation rollbacks) that may lead to a re-acceleration in inflationary pressures. Investors should note that the Personal Consumption Expenditures (PCE) Price Index, the gauge of inflation most closely tracked by the Fed, was due after we went to press.
Meantime, fourth-quarter earnings season got off to a strong start. The big banks and a slew of financial services companies easily exceeded expectations. As of press time, the consensus forecast for profit growth for the S&P 500 companies was roughly 13%. That would mark the strongest year-over year improvement in three years. This profit growth will likely be needed to justify the S&P 500 Index’s elevated price-to-earnings multiple.
Competition from China in the artificial intelligence (AI) arms race seems to be heating up. This was seen with the recent announcement from DeepSeek. The China-based AI start-up reports that it has developed an open-source AI model at a fraction of the cost it took Open AI to create ChatGPT. This could lead companies to reassess how much they spend on AI processing chips and infrastructure buildout. Many technology stocks sold off sharply on the news, with semiconductor giant NVIDIA, which is at the forefront of the United States-led AI revolution, losing $589 billion in market capitalization before recovering some ground.
Conclusion: Given some of the growing uncertainty in the technology sector, where valuations look stretched in any event, we think a diversified portfolio consisting of high-quality companies that generate steady earnings and cash flow growth may be the best way of limiting some possible near-term downside risk.
Source: ValueLine.com
