Market Review
Post-election rally ends on U.S. government shutdown concerns Global markets remain resilient amid an artificial intelligence-related equity selloff.
Despite investor concerns about the trajectory of artificial intelligence (AI)-related stocks, in January, global markets delivered the strongest monthly returns since May 2024, with the MSCI All Country World Index (ACWI) up nearly 4%. From a technical analysis perspective, the S&P 500® had its first peak-to-trough decline of more than 5% since August — only to reclaim an all-time high in late January, showcasing the persistence of positive momentum.
During the month, global equities shrugged off the material decline in NVIDIA Corporation’s stock, the largest company by market capitalization in the world, to deliver positive returns for value, small-capitalization (cap) and non-U.S. equities. In fact, market breadth for the ACWI improved in January as market leadership rotated, and positive momentum strengthened (Figure 1).
Figure 1. Percent of S&P 500 Companies Above Their 200-day Moving Average
Improving market breadth is a positive for market durability
As of 1/31/2025. Source: Bloomberg L.P.
View accessible version of this chart.
A laggard in 2024, developed international equities led markets higher in January as investor fears eased in U.S. foreign trade and tariff policies. Traditional cyclical sectors, such as Financials and Industrials, led as did industries within Consumer Discretionary that are dependent on international sales, such as consumer apparel and automobiles.
Relatively high interest rates in the U.S. continue to be a headwind as they lead to increased borrowing costs for international companies that want to issue debt in U.S. dollars. For example, while the 2-year U.S. Treasury declined in January, its spread with the 2-year German sovereign yield is still approximately 60 basis points wider than its five-year average.
Theme of the Month
Tariffs and AI models and earnings, oh my!
When macroeconomic uncertainty, whether due to changes in foreign trade policy or innovation, catches investors by surprise in the short run, we believe it is important to stay focused on the long run. In other words, we ascribe to Warren Buffett’s famous quote, “the stock market is a device for transferring money from the impatient to the patient.”
The imposition of U.S. tariffs against key trading partners, such as Canada and Mexico, came into focus in January. As of this writing, it is unknown whether tariffs will go into effect as they have been delayed until the beginning of March, but it has created investor uncertainty in the short run. Together, Canada and Mexico are the United States’ largest trading partners by volume. While less than 2% of revenues for the Russell 3000® come from both countries, their supply chains are critical to several industries, such as food and beverage, homebuilders and oil and gas storage.
In 2018 the United States imposed tariffs on China with limited impact to inflation (Figure 2). Should tariffs come to fruition in the near term, we believe they will complicate the macroenvironment, but the long-term backdrop will still be driven by two critical components of the business cycle: consumer spending and earnings.
Figure 2. Core PCE (y/y)
In our view, the current inflation environment complicates the use of historical tariffs as a guide
As of 1/31/2025. Source: Bloomberg L.P.
View accessible version of this chart.
Tariffs were not the only buzzword for markets in January; investors were also caught flat-footed when Chinese technology firm DeepSeek, released a new AI model that allegedly only cost $6 million to produce, in sharp contrast to the billions spent by leading U.S. firms in developing competing products. Suddenly, investors questioned their knowledge of the entire AI infrastructure complex and supply chain.
While it has only been about two years since ChatGPT entered the cultural zeitgeist, the race for AI dominance has been at full speed since. Given the contrasting costs between new and legacy AI models, the rapid ramp up in data center construction is a development we are monitoring closely (Figure 3).
Figure 3. Monthly U.S. Data Center Private Construction (Millions)
Since late 2022, data center capex has been a key indicator of AI computing needs
As of 1/31/2025. Source: Bloomberg L.P.
View accessible version of this chart.
As we stated in our 2025 Outlook, mega-cap companies no longer enjoy the capital-lite balance sheets of the prior business cycle. Whereas their focus used to be cloud computing and software applications, AI’s current conventions require significant computing power, data-center resources and high energy usage, causing these companies to significantly increase their capital expenditures (capex) over the past two years. In our view, this has helped offset the contraction in traditional U.S. manufacturing as automobile and aerospace production remains subdued. Therefore, should AI capex slow rapidly due to the evolving innovation cycle, the 2025 earnings outlook would potentially require a material adjustment downward.
That said, many of the biggest AI-related companies have reaffirmed their capex plans for 2025 in recent earnings reports. In turn, that has helped many AI-related stocks stabilize and rebound. Unfortunately, investors will have to wait a few weeks until NVIDIA Corp. reports earnings. By then, investors may have more clarity about the path forward for AI models, and ultimately their impact on the earnings outlook for 2025.
For more information, please contact your PNC advisor.
Figure 1: Percent of S&P 500 Companies Above Their 200-day Moving Average (view image)
Improving market breadth is a positive for market durability
Date |
Percent of Members Above 200-day Moving Average |
1/2024 |
71.69 |
2/2024 |
76.55 |
3/2024 |
85.97 |
4/2024 |
72.49 |
5/2024 |
72.49 |
6/2024 |
70.28 |
7/2024 |
80.2 |
8/2024 |
79.6 |
9/2024 |
81.2 |
10/2024 |
69.74 |
11/2024 |
76.51 |
12/2024 |
56.51 |
1/2025 |
62.4 |
As of 1/31/2025. Source: Bloomberg L.P.
Figure 2: Core PCE (y/y) (view image)
In our view, the current inflation environment complicates the use of historical tariffs as a guide
Year |
Last Price |
6/2015 |
1.2% |
12/2016 |
1.7% |
6/2017 |
1.5% |
12/2018 |
2.0% |
6/2019 |
1.6% |
12/2020 |
1.5% |
6/2021 |
3.8% |
12/2022 |
4.9% |
6/2023 |
4.3% |
12/2024 |
2.7% |
As of 1/31/2025. Source: Source: Bloomberg L.P.
Figure 3: Monthly U.S. Data Center Private Construction (Millions) (view image)
Since late 2022, data center capex has been a key indicator of AI computing needs
Date |
U.S. Data Center Private Construction |
2/2015 |
1934 |
4/2016 |
4415 |
6/2017 |
4577 |
8/2018 |
6870 |
10/2019 |
9219 |
12/2020 |
9195 |
2/2022 |
10553 |
4/2023 |
16144 |
12/2024 |
32599 |
As of 1/31/2025. Source: Bloomberg L.P.
