January Review: a not-so-boring start to 2025

Horacio Coutino, multi-asset strategist

Q4 Earnings in focus

At this early stage, the fourth-quarter earnings season for the S&P 500 is showing strong performance. The percentage of companies exceeding earnings expectations, and the magnitude of these surprises, is above their 10-year averages. Additionally, the index is reporting its highest year-over-year earnings growth rate for a fourth quarter in three years.

Beyond the robust earnings season, market attention has shifted toward the sustainability of capital expenditures in AI infrastructure, particularly in light of DeepSeek’s model and the potential for widespread adoption. While US yields have remained elevated, they have not posed a significant headwind for sectors positioned to benefit from the policy initiatives of the new US administration.

Data compiled by LSEG I/B/E/S as of 28^th January, 2024, indicate that 94, or 18.8%, of S&P 500 constituents have reported Q4 results. Of those reporting, 75.5% exceeded EPS estimates, surpassing both the 5-year average of 77%, and the 10-year average of 75%.

The increase in the index's overall earnings growth rate over the past week can be primarily attributed to positive EPS surprises reported by companies in the Financials sector. Since 31^st December, this trend has continued, with the Financials sector's strong performance being partially offset by downward revisions to EPS estimates for companies in the Energy sector.

The blended earnings growth rate for Q4 is 12.7%, higher than the 11.8% forecast at quarter-end. Should this figure hold, it will mark the sixth consecutive quarter of y/o/y earnings growth for the index.

Seven of the eleven sectors within the S&P 500 are reporting y/o/y earnings growth, led by the Financials, Communication Services, and Information Technology sectors. Six of these seven sectors are reporting double-digit growth. Conversely, four sectors are experiencing y/o/y declines for the quarter, and Energy is the only sector within these four reporting a double-digit decline.

Since 31^st December, S&P 500 companies have exceeded earnings expectations by an aggregate of 6.8%. While this surpasses the average surprise factor observed in the preceding four quarters of +4.9%, and the 10-year average of +6.7%, it falls short of the 5-year average of +8.5%.

The Utilities sector demonstrates the most significant positive difference between actual and estimated earnings reflecting an earning surprise factor of +47.6%, followed by Financials at +15.2% and Real Estate at +6.4%.

With respect to revenue, 63.8% of S&P 500 constituents exceeded projections, a figure that trails both the 5-year average of 69.0% and the 10-year average of 64.0%. In aggregate, revenues surpassed estimates by 0.7%, notably lower than the 5-year average of 2.1% and lower than the 10-year average of 1.4%.

The blended revenue growth rate for Q4 is currently 4.6%, compared to the 4.6% forecast at quarter-end. A negative revenue surprise from a Utilities sector company was the primary driver of the slight decline in the index's overall revenue growth rate over the past week. Since 31^st December, positive revenue surprises in the Financials sector have been counterbalanced by negative surprises in other sectors, particularly Utilities, leading to a stagnant overall revenue growth rate for the index. Should the index achieve 4.6% revenue growth for the quarter, it will signify the 17^th consecutive quarter of revenue growth.

Eight sectors are reporting y/o/y revenue growth, led by Information Technology, Communication Services, and Health Care. On the other hand, three sectors are reporting a y/o/y decline in revenues for Q4, led by the Energy sector.

The forward 12-month P/E ratio of the S&P 500 stands at 22.0x. This surpasses both the 5-year average of 19.7x and the 10-year average of 18.2x, and represents a decline from the 22.4x recorded at the end of the Q4.

102 S&P 500 companies (including 9 Dow 30 components) are scheduled to release their Q4 results during the week of 3^rd February.

S&P 500 Earnings Growth: 12.7%

Seven of the eleven sectors have reported or are projected to report y/o/y earnings growth for Q4 2024. An actual growth rate of 12.7% for the quarter would represent the index's highest y/o/y earnings growth since the 31.4% recorded in Q4 2021.

Financials stands out with the highest y/o/y earnings growth rate among all sectors, at +49.4%. At the industry level, 4 of the 5 industries in the sector are reporting y/o/y earnings growth. Banks, Consumer Finance, Capital Markets, and Financial Services are all projected to achieve double-digit earnings growth, with Banks leading the way at an impressive 216%. This surge in the Banks industry can primarily be attributed to favorable comparisons against the previous year's quarter, which was negatively impacted by significant charges related to FDIC special assessments and other extraordinary items that were included in their GAAP EPS. Excluding Banks would significantly reduce the blended earnings growth rate for the Financials sector from 49.4% to 17.3%.

Financials is also the sector that has recorded the highest increase in their earnings growth rate since the end of the quarter due to upward revisions to EPS estimates and positive earnings surprises, from 39.1% to 49.4%.

The Communication Services sector exhibits the second-strongest y/o/y earnings growth rate among all eleven sectors, at +20.7%. Within this sector, four of the five constituent industries are experiencing, or are projected to experience, y/o/y earnings growth: The Entertainment industry is leading the way with a projected 49% year-over-year earnings growth, followed closely by Wireless Telecommunication Services at 38%. Interactive Media & Services and Media round out the top performers with expected growth rates of 25% and 8%, respectively. Conversely, the Diversified Telecommunication Services industry is the sole industry within the sector reporting a y/o/y earnings decline of 2%.

The Interactive Media & Services industry is poised to be the primary catalyst for earnings growth within the sector. Excluding this industry, the sector's estimated earnings growth rate moderates to 13.7% from 20.7%.

The Information Technology sector reports the third-highest y/o/y earnings growth rate among the eleven sectors, with a 14.0% increase. Five of the six constituent industries within this sector are either reporting or projected to report positive y/o/y earnings growth. The Semiconductors & Semiconductor Equipment industry leads with a substantial 36% growth rate, followed by Electronic Equipment, Instruments, & Components at 13%. Technology Hardware, Storage, & Peripherals, Software, and Communications Equipment are also contributing positively, with growth rates of 9%, 8%, and 3%, respectively. Conversely, the IT Services industry is the sole segment experiencing a y/o/y earnings decline, registering a decrease of 12%.

The Semiconductors & Semiconductor Equipment industry serves as the primary driver of earnings growth for the sector. Excluding this industry from the calculation reduces the sector's blended earnings growth rate from 14.0% to 6.1%.

Conversely, the Energy sector recorded the most substantial earnings contraction among the eleven sectors, registering a y/o/y decline of -30.7%. This decline is primarily attributed to the decrease in oil prices compared to the same period last year. The average price of oil in Q4 2024 was $70.32 per barrel, reflecting a 10.45% decrease from the $78.53 average price in Q4 2023. The overall decline in Energy's earnings was primarily attributed to significant underperformance in the Oil & Gas Refining & Marketing, Integrated Oil & Gas, and Oil & Gas Exploration & Production sub-industries, which recorded y/o/y declines of 102%, 33%, and 12%, respectively. Conversely, the Oil & Gas Equipment & Services and Oil & Gas Storage & Transportation sub-industries exhibited positive y/o/y earnings growth of 14% and 13%, respectively.

Beyond its impact on earnings, the Energy sector also exerted the most significant downward pressure on the index's overall revenue growth rate due to downward revisions to EPS estimates since 31^st December. The sector experienced a further deterioration in blended revenue performance, with the y/o/y decline increasing from -24.5% to -30.7%.

S&P 500 Net Profit margin: 12.1%

As of 24^th January, according to Factset, the blended net profit margin for the S&P 500 in Q4 2024 has reached 12.1%. This figure is slightly below Q3's net profit margin of 12.2%, but above the year-ago net profit margin of 11.3%, and surpasses the 5-year average of 11.6%.

At the sector level, seven sectors experienced a y/o/y increase in their net profit margins in Q4. Leading this growth is the Financials sector, with a 5.5 percentage point increase, from 13.5% to 18.9%. Conversely, four sectors reported y/o/y declines in their net profit margins, with the Energy sector experiencing the most significant contraction of 3.0 percentage points, from 10.4% to 7.4%.

Furthermore, five sectors reported Q4 net profit margins exceeding their 5-year averages. Financials demonstrated the most significant positive deviation, with a net profit margin of 18.9% compared to its 5-year average of 16.6%. In contrast, six sectors reported Q4 net profit margins below their 5-year averages, most notably Materials, with a net profit margin of 8.9% compared to its 5-year average of 11.1%.

The S&P 500 reaction to earnings

The market has demonstrated a heightened sensitivity to Q4 earnings surprises among S&P 500 companies. Companies that have exceeded earnings expectations have been rewarded with above-average stock price gains, while those that have fallen short have experienced more severe than average declines.

Companies that surpassed earnings expectations were rewarded with an average price increase of +2.8% in the two-day window surrounding their earnings release. This exceeds the 5-year average price increase of +1.0% observed for companies reporting positive surprises.

Conversely, companies that fell short of earnings expectations experienced a more pronounced negative market reaction. Their share prices declined by an average of -3.7% in the two-day window surrounding the earnings release, a larger decrease than the 5-year average of -2.3% observed for companies with negative surprises.

The S&P 500 is +4.13% since this earnings season began on 10^th January.

Global backdrop

During January, investor attention centred on the potential ramifications of evolving fiscal, trade, and regulatory policies under the newly established US administration, in addition to the performance of sectors that had released Q4 2024 earnings reports. Notably, sectors like Communication Services and Financials outperformed, influenced by robust earnings growth and upbeat growth forecasts for the US economy. A divergence in performance was observed between major US and European equity indices. US indices ended the period near record highs, though their performance converged towards their historical monthly median. Conversely, European indices demonstrated robust growth. Additionally, January witnessed the market solidifying its expectations of a pause in the pace of monetary easing by the Fed, following a fairly robust December nonfarm payrolls report released on 10^th January.

• According to the CME FedWatch tool, interest rate swaps have now priced in a 18.0% probability that the Fed rate will be set lower, in the target range of 4.00 - 4.25% at its 19^th March meeting. This is significantly lower than 30^th December pricing which assigned a 46.9% probability of a rate reduction to the target range of 4.00 - 4.25% on that date. Additionally, interest rate swaps have priced in a 82.0% probability of no change in policy.
• Yields have moved in different directions across regions in January. The US 10-year yield was -3.2 basis points (bps) to 4.544%, while the 10-year German Bund was +21.4 bps to 2.583%. The spread between the two narrowed by 12.2 bps from 208.3 bps at the end of December to 196.1 bps now.
• The US dollar depreciated in January. The US Dollar Index, at 107.85, was -0.50% MTD. The euro was +0.64% MTD against the dollar, while Sterling was -0.53% MTD in January.

Regional breakdown

US

S&P 500 +2.68% MTD
Nasdaq 100 +2.15% MTD 
Dow Jones Industrial Average +5.10% MTD 
Russell 2000 +2.37% MTD 

Note: As of 5pm EDT 29 January 2025.

Source: Factset

Ten of the eleven S&P 500 sectors experienced positive performance in January. Communication Services led the index's performance this month, at +6.95%, followed by Financials at +6.07% and Health Care +5.76%. Conversely, Information Technology underperformed at -1.62%.

In January, unlike December, the equal-weighted version of the S&P 500 outperformed the benchmark by 0.46 percentage points MTD, yielding a +3.14% return compared to the S&P 500's +2.68%.

Source: Factset

An analysis of the past five years (60 months) demonstrates that the January performance of major US stock indices has been lukewarm, slightly above their median monthly returns, and only one major index registering monthly performance above the 80^th percentile. The Dow Jones’ January performance at +5.10% ranks at the 81.3^rd percentile, being the strongest among major US equity indices. The Russell 2000’s January performance follows ranking at the 62.7^th percentile, signifying that 22 out of the past 60 months have witnessed higher performance. The S&P 500's January performance of +2.68% ranks at its 55.9^th percentile, indicating that 27 months out of the past 60 have seen a stronger performance. Finally, the Nasdaq 100’s performance ranks at the 52.5^th percentile within the context of the past 60 months.

Europe

Stoxx Europe 600 +5.25% MTD 
Germany DAX +8.68% MTD 
FTSE 100 +4.71% MTD
France CAC 40 +6.66% MTD
Spain IBEX 35 +5.96% MTD
MSCI Europe +5.86% MTD

Source: Factset

In January, the Stoxx Europe 600 displayed a positive performance across 16 of its 17 sectors. Banks emerged as the frontrunner, +9.66%, followed by Personal & Household Goods +8.65% and Financial Services at +8.46%. Conversely, Utilities underperformed at -0.18%.

A comparative analysis of the Stoxx Europe 600 Equal Weight (EW) index reveals a contrasting picture. The EW index, which assigns equal weight to each constituent company, posted a +4.21% return in January, underperforming the standard Stoxx Europe 600's +5.25% by 1.04 percentage points. This analysis indicates a less equitable distribution of growth among EW index constituents. In contrast, the concentration of large-cap companies within the main index may have sustained its overall performance.

Source: Factset

An analysis of equity index performance over the preceding five years (60 months) reveals that European equity indices outperformed US markets in January 2024. All European indices exhibited strong positive returns, ranking within the top quintile for the month.

FTSE 100’s January performance ranked at the 96.6^th percentile, indicating that 58 months within this timeframe have yielded lower returns, exhibiting the strongest January performance among major European indices. Within the past five years, only two months have witnessed stronger performance for the FTSE 100 than that observed in January 2024: November 2020, with an increase of 12.35%, and November 2022, with an increase of 6.75%. The MSCI Europe, Germany's DAX, and France's CAC 40 indices all exhibited robust performance, with each recording gains exceeding 5%. These returns placed them within the 91.5^th percentile for their respective 5-year performance distributions. Stoxx Europe 600’s at +5.25% ranked at the 84.7^th percentile.

Spain IBEX 35’s performance at +5.96% resided at the 88.1^st percentile, indicating that its performance in only 7 of the past 60 months has been superior to that of January 2024.

As of 28^th January, according to LSEG I/B/E/S data for the STOXX 600, Q4 2024 earnings are expected to increase 1.5% from Q4 2023. Excluding the Energy sector, earnings are expected to increase 5.3%. Q4 2024 revenue is expected to increase 1.7% from Q4 2023. Excluding the Energy sector, revenues are expected to increase 4.9%. Of the 17 companies in the STOXX 600 that have reported earnings by 28^th January for Q4 2024, 52.9% reported results exceeding analyst estimates. In a typical quarter 54% beat analyst EPS estimates. Of the 20 companies in the STOXX 600 that have reported revenue for Q4 2024, 75.0% reported revenue exceeding analyst estimates. In a typical quarter 58% beat analyst revenue estimates.

Consumer Cyclicals and Industrials, at 100%, are the sectors with most companies reporting above estimates. At 172%, Industrials is the sector that beat earnings expectations by the highest surprise factor. In the Basic Materials, Consumer Non-cyclicals, and Technology sectors, 100% of companies have reported below estimates. Additionally, Consumer Non-Cyclicals' earnings surprise factor was the lowest at -4%. The STOXX 600 surprise factor is 2.4%, which is below the long-term (since 2012) average surprise factor of 5.8%. The forward four-quarter price-to-earnings ratio (P/E) for the STOXX 600 sits at 13.7x, below the 10-year average of 14.3x.

During the week of 3^rd February, 65 companies scheduled to report Q4 earnings.

Analysts anticipate positive Q4 earnings growth from nine of the sixteen countries represented in the STOXX 600 index. Ireland (946.2%) and Poland (39.7%) have the highest estimated earnings growth rates, while Austria (-26.7%) and Italy (-20.1%) have the lowest estimated growth.

Tariffs are coming

The potential imposition of tariffs has become a primary concern for investors, as it represents an area where the US president possesses significant unilateral authority to disrupt market expectations regarding continued growth and receding inflation. 

Recent press reports citing White House trade officials have reinforced the notion that the implementation of tariffs is just a matter of timing rather than a question of whether they will occur. The President himself said on Monday, 27^th January, that he has a specific tariff figure in mind, but has not settled on a decision yet. Moreover, these remarks align with his view of tariffs as a critical tool within his broader economic agenda.

‘What? Me? Worry?’

Until DeepSeek and AI’s retreat on 27^th January, market sentiment was predominantly focused on the positive aspects of the President's initial policies, with the S&P 500 reaching all-time highs of 6,618.71 on 22^nd January. This optimism was partly fueled by the absence of immediate punitive tariffs following President Trump's inauguration, with the President instead indicating a 1^st February timeframe for measures on Mexico, Canada, and China. Subsequent comments from the President regarding European and Chinese tariffs also allowed for a more dovish market interpretation.

Currently, capital markets are bracing for higher US import tariffs, although the prevailing consensus suggests that the potential impact of these tariffs may be less severe than initially feared. Expectations are that any tariffs ultimately imposed will be more strategically targeted than universally applied, implemented gradually rather than abruptly, and set at relatively lower rates than originally proposed (60% on China, 25% on USMCA partners, and 10% on the rest of the world). Furthermore, tariffs are being considered as a one-time adjustment to price levels, resulting in transitory rather than lasting inflationary effects.

However, with a measure of calm returning to the tech sector since Tuesday, 28^th January, tariff concerns may yet resurface. In an address to the World Economic Forum, President Trump reiterated his stance on tariffs, stating that if companies 'don't make their products in the US,' then 'very simply,' they 'will have to pay a tariff.'

The Financial Times reported this week that US Treasury Secretary Scott Bessent is advocating for universal tariffs starting at 2.5%, with a monthly increase of the same amount until they reach as high as 20%. On 27^th January, Trump signalled support for an even more aggressive approach, announcing plans to impose tariffs on computer chips, medicine, and metal imports in a bid to ‘bring production back to our country.’

These statements suggest that investors should brace for increasingly aggressive trade policies from the US. The effective US tariff rate on Chinese imports - currently at 11% - is expected to increase significantly over time. To prevent Chinese goods from being rerouted through countries like Vietnam and Mexico, stricter Rules of Origin may also be implemented. Additionally, the US is likely to impose tariffs on European automobiles, including EVs. In response, countermeasures by both China and the European Union seem likely.

A Colombian lesson for USMCA partners?

Within a 12-hour period, the Colombian government's stance on US repatriation flights underwent a series of dramatic shifts. Initially, Colombia pledged to obstruct these flights, then threatened to impose retaliatory tariffs of 50% on US goods, before ultimately acquiescing to the original terms. This sequence of events signals the US administration's intent. Sources within the White House revealed to Reuters that the US president aimed to use Colombia as an ‘example of US power’, a sentiment later echoed in an official press statement indicating that the US president ‘expects all other nations of the world to fully cooperate.’

Free trade agreements (FTAs) with the US are no shield against tariff threats. Despite the 2012 ratification of the Colombia-US FTA and Colombia's significant role as an oil exporter to the US, the US administration proceeded with tariff threats. While legal challenges and trade dispute mechanisms may ultimately contest the validity of tariffs imposed on countries with established FTAs, the process itself can be protracted. Similarly, Canada and Mexico, despite being members of the USMCA, remain susceptible to such pressures. The US president has previously demonstrated a willingness to impose tariffs under the International Emergency Economic Powers Act (IEEPA) by citing immigration or national security concerns, as in the case with the threatened 25% blanket tariffs on Mexico.

Both Mexico and Canada are vulnerable to near term headline risks, sudden changes in US trade policy, which can negatively impact investor sentiment and lead to market volatility. Moreover, irrespective of legal outcomes, the economic consequences of tariffs will continue to accrue throughout any legal challenge, providing the US President with a heightened focus on tariffs as transactional negotiating leverage to force changes. Consequently, we anticipate more tariff threats and asset volatility ahead.

Known unknowns: How will the rest of the world react?

While the 2025 US economic outlook appears generally positive, investors should be wary of potential repercussions stemming from escalating trade tensions. The retaliatory aspect of tit-for-tat trade wars, specifically how other nations respond to US protectionism, remains a significant unknown and a potential source of disruption for US firms. This risk is a wildcard not fully discounted, and could prove to be disruptive and costly for US firms.

Specifically, retaliatory measures could exacerbate global supply chain disruptions, leading to lower corporate earnings growth, they could trigger higher prices for goods and services, fueling inflationary expectations and heightening crosscurrents for central banks to navigate, potentially stalling the global easing cycle, and even induce recessions in trade-dependent economies such as Germany, Canada, and Mexico.

Unlike the President's first term trade impulses, which often caught the world off guard, governments are now anticipating and preparing for potential US protectionism. Having learned from past experience, countries are proactively developing their own lists of retaliatory tariffs on US goods and services. Historical precedents suggest potential targets include agricultural products like soybeans, pork, almonds, and wheat (China); automobiles, machinery, and consumer goods such as whiskey and wine (Europe); lumber, crude oil, and natural gas can also be on the list of some nations (Canada and Mexico).

Retaliatory measures may extend beyond tariffs on goods and services. The rest of the world could employ other tactics to counteract protectionist policies, potentially leading to significant repercussions for US firms. For example, foreign direct investment restrictions have been on the rise over the past decade, and this trend could accelerate, limiting US companies' ability to expand and operate in foreign markets. The EU and China could implement company-specific regulatory investigations or blacklists, hindering US companies' domestic and international operations. US technology companies are front and centre when it comes to more restrictions on crossborder digital activities. Additionally, domestic subsidies and export controls, limiting the competitiveness of US firms, are becoming popular.

A great example illustrating the global sweep of protectionist sentiment is Japan's decision to review the buyout offer by Canada's Alimentation Couche-Tard of 7-Eleven, a convenience store chain, under the lens of ‘economic security.’ Last year, the Finance Ministry designated the company as crucial to national security in Japan. At the time, Japan’s economy minister Ryosei Akazawa said convenience stores and their distribution networks could, for example, be utilised in the event of disaster to help bring hot food to people in affected regions.

What is clear is that tariffs can be a slippery slope to more global protectionism and its knock-on effects. This could lead to a more fragmented and inward-looking global economy, hindering US companies' access to essential resources and markets. Escalating trade tensions and creating new frictions where none existed can lead to rising inflationary expectations, disrupt global supply chains, and ultimately stifle global economic growth.

Finally, even the use of tariffs as a negotiating tactic fosters business uncertainty, which may reduce visibility for long-term business sentiment and investment. The current administration's approach of leveraging trade policy to achieve foreign policy objectives adds another layer of complexity. This introduces more unpredictable and non-economic factors into decision-making.

Investors' considerations for AI after DeepSeek

Hedge fund manager Liang Wenfeng’s DeepSeek recently launched its latest open-source AI model along with a research paper explaining how it was built at a fraction of the training and inference costs compared to top models from well-funded US companies.

This news shocked markets, causing AI stocks to tumble. Nvidia lost 17% of its value on the day the news was released. What this shows is that the AI landscape is constantly evolving, and where the most value lies in the chain will shift over time. As technology advances and competition heats up, investors may need to rethink where they place their bets—whether on the infrastructure that enables AI, the intelligence layer, or the applications that use it. Similarly to the internet’s evolution, many expect the biggest opportunities to eventually move from those building the technology (the enabling layer) to those using it (the application layer). Still, it’s too early to make big calls. While cheaper AI models could lower computing costs, they could also fuel more demand for infrastructure as AI adoption spreads. More clarity on DeepSeek’s impact, big tech’s CapEx plans, and AI monetisation is likely to emerge in the upcoming Q4 2024 earnings reports. 

Therefore, there are some key questions investors should be asking including:

• To what extent has the recent market downturn been driven by fundamentals versus sentiment?

• How significantly does DeepSeek’s approach reduce power consumption and, consequently, demand for semiconductors and data centres?

The price swings suggest investors are thinking about DeepSeek’s ability to make AI more efficient, but it’s unlikely the previous market rally was based purely on fundamentals. Much like the early days of the internet, people know AI is going to be a game-changer, but remain uncertain about its precise monetisation timeline.

In a sentiment-driven market, predicting future developments becomes even more challenging. Sentiment is inherently unpredictable—while excitement can build further, heightened enthusiasm also increases vulnerability to setbacks. DeepSeek could be the catalyst for that shift.

This episode highlights two key aspects: first, the impressive advancement of Chinese AI innovation despite US attempts to restrict its access to critical technology; and second, the possibility that DeepSeek has breached OpenAI's terms of service and copyright protections. There’s cruel irony here - OpenAI spent years training its models on publicly available data, and now it might be dealing with a competitor repurposing its own content. 

DeepSeek’s latest models seem to use ‘distillation,’ a method where AI is trained by learning from other models. Their open-source approach also raises an interesting point: adapted open-source models are increasingly matching the performance of proprietary solutions across multiple domains. The now-infamous internal Google memo, titled “We Have No Moat… and Neither Does OpenAI,” had already highlighted this vulnerability. 

DeepSeek really caught the market’s attention when its app briefly overtook ChatGPT in App Store rankings.

Two significant shifts have emerged:

• Even with concerns about how DeepSeek operates, its rapid progress shows that China’s AI-Large Language Models (AI-LLMs) are further along than many expected. The era of AI-LLM breakthroughs being exclusively within the US domain appears to be ending.

• More efficient training and inference processes, along with potential alternatives to Nvidia’s software ecosystem, could lead to a reassessment of long-term demand for Nvidia’s products. For instance, if DeepSeek’s coding optimisations enable users to overcome AMD’s weaker chip-to-chip communication, companies may increasingly consider running inference models on AMD GPUs, which offer a cost advantage over Nvidia on a per-FLOP basis.  

These developments highlight the risks associated with overly concentrated or excessively passive investment strategies, as value within the AI ecosystem can shift rapidly. A diversified and actively managed approach may be essential to navigating this complex and rapidly shifting environment effectively.

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