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Big Tech’s Big Test

Market Update

03.02.2025

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What happened last week?

Global

  • Chinese startup DeepSeek shook up the tech world with a low-cost “reasoning” AI model.

US

  • The Federal Reserve kept interest rates unchanged and warned markets to be patient.
  • Big Tech’s earnings delivered mixed results relative to high hopes.

Europe

  • The European Central Bank cut interest rates for the fifth time as the eurozone economy struggles.

Why It Matters

China’s DeepSeek – a tiny startup, barely a year old – unveiled an open-source AI model that rivals OpenAI’s GPT-4, but at a fraction of the cost. That’s a wake-up call for Big Tech, proving cutting-edge AI isn’t just for the biggest players. The debut also challenged the assumption that AI progress depends on ever-growing computing power, sending Nvidia’s stock tumbling 17%. Still, tech CEOs saw a bullish signal in the market-rattling mayhem: AI is evolving fast, lowering barriers, and creating an even bigger market, they said.

Four of the “Magnificent Seven” tech giants delivered strong earnings updates, but investors’ sky-high expectations meant the market’s reaction was mixed. Microsoft’s revenue was better than expected, but slower cloud growth raised questions about its AI strategy. Meta topped forecasts too, but warned of slowing sales and rising costs. Apple’s holiday revenue hit a record high, but China remained a weak spot. Tesla had the roughest ride – falling short on sales and profit, and slashing its outlook for this quarter. The silver lining, at least, is that lower expectations are easier to beat.

The Federal Reserve (Fed) kept interest rates steady at nearly 5% and signalled it’s in no rush to cut them. US inflation has cooled, but the central bank wants more proof it’s fully under control before easing up. That means borrowing costs will stay high for now, keeping the pressure high on businesses, consumers, and markets. At least the central bank didn’t hint at hiking either. Investors are still betting the first rate-cut will come in June – just don’t expect the Fed to rush into it.

It wasn’t quite the same story across the pond: the European Central Bank just cut interest rates for the fifth time since June, as the eurozone economy stalled. Like the Fed, the central bank has been keeping its cards close to the chest. Even with the key rate now at just 2.5%, there could yet be more cuts on the table if the region’s slowdown deepens.

 

The Focus This Week: Big Tech’s Big Test

Companies delivering quarterly earnings last week treated the world to the usual repertoire of grandiose AI visions – 2025 is the year, they said, and cheaper models are on track to bring AI to the masses. But big talk demands big results, and last week’s batch was modest if anything. No pressure, then, for Alphabet, Amazon, and Palantir as they open their books this week. Investors will be looking beyond their sci-fi dream-weaving, and focusing on cloud growth, enterprise AI adoption, and consumer demand – because, let’s be honest, that’s what really pays the bills.

These earnings couldn’t come at a more interesting moment: just last week DeepSeek sent shockwaves (and a sharp selloff) through global markets with the launch of its breakthrough low-cost “reasoning” AI model. The debut – made far faster and far cheaper than some of its US counterparts – is already challenging all the assumptions about AI’s economics, development, and the US-China tech gap. So, while revenue numbers from Big Tech’s latest quarter will matter this week, investors are just as eager to hear what the “Magnificent Seven” CEOs have to say about the tiny Chinese startup that’s just ripped up the AI rulebook. For now, the big names are putting on a brave face and calling it bullish – but with Nvidia still nursing a deep selloff wound, America’s tech bigwigs might have a bit more explaining to do.

Meanwhile, miles from Silicon Valley, Alibaba is the one to watch as earnings roll in. The ecommerce and cloud giant just quietly claimed that its latest AI model outperforms Meta’s and DeepSeek’s on key benchmarks – and can handle longer inputs, a major advantage for AI agents with memory-heavy work. This isn’t just about AI bragging rights – cheaper computing can boost the company’s cloud and e-commerce businesses, just as sentiment on Chinese tech appears to be turning. With Alibaba still trading at a steep discount to its US peers, a strong earnings report could be the spark it needs to build some serious momentum – making it one to keep on your radar.

The Week Ahead

  • Monday: Eurozone inflation (January), US manufacturing activity (January). Earnings: Palantir.
  • Tuesday: China manufacturing activity (January). Earnings: Alphabet, Estée Lauder, PayPal, PepsiCo, Pfizer, Spotify, AMD, Super Micro Computer, Merck.
  • Wednesday: US service sector activity (January). Earnings: Alibaba, MicroStrategy, Uber, Walt Disney, ARM, Ford, Novo Nordisk, Qualcomm.
  • Thursday: Bank of England interest rate decision, eurozone retail sales (December). Earnings: Amazon, Pinterest, Philip Morris, Eli Lilly.
  • Friday: US jobs report (January), US consumer confidence (February), Japan household spending (December).

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