A Pivotal Week: Tech Shift, Fed Patience, Tariff Turbulence

What a week! Markets were rocked by a series of developments—from AI news that could reshape the tech sector, to the Fed’s policy stance, and the tariffs on Mexico, Canada, and China that could inject fresh uncertainty into global trade. Each of these themes carries significant implications for investors as we assess the landscape heading into February.

The AI revolution took a new turn with the introduction of DeepSeek, with new expectations and the potential to make AI more accessible and affordable. This is great news for businesses, consumers and the economy at large that can leverage AI to enhance productivity, but it raises questions for chip producers like NVIDIA and the high-power infrastructure enablers. If high-powered Blackwell chips are no longer essential for top-tier AI applications, margins for the dominant players in the sector could come under pressure. However, it’s not a clear-cut negative for all chipmakers—demand for lower-end chips may rise as AI becomes more efficient, shifting the balance within the semiconductor industry.

The broader takeaway? Cheaper AI means better productivity, higher margins for AI adopters, and a potential tailwind for both tech and non-tech sectors that stand to benefit from AI-driven efficiencies. This could nudge the market narrative away from the Magnificent 7 towards everything else and notably value stocks, which have lagged behind high-growth tech plays.

Meanwhile, the Fed’s latest meeting didn’t yield any surprises. Powell removed language about the need for “further progress” on inflation, but he made it clear that this wasn’t a hawkish shift—just a cleanup of language. The Fed remains patient, and I believe we’ll see at most two rate cuts this year unless economic conditions weaken meaningfully. Growth remains steady, with jobless claims at a healthy 207,000 and GDP tracking between 2.5% and 3% for the first quarter. This isn’t an environment that screams urgent rate cuts, particularly when core inflation metrics remain on target. Next week’s employment report will be a key data point, with expectations of 130,000 job gains and a stable unemployment rate of 4.1%. If the labor market remains resilient, the Fed will feel even less pressure to act quickly.

The wildcard in all of this? Tariffs. The prospect of new trade barriers has introduced another layer of volatility, with markets reacting negatively to the uncertainty. History has shown that tariffs are rarely viewed as a net positive for equities, and while they could lead to a temporary bump in inflation and price levels, the Fed is unlikely to respond to a one-time inflationary shock. The dollar’s strength is also acting as a partial offset, but until we get clarity on the extent and duration of these trade policies, markets will remain on edge.

Trump’s new tariffs are not smart either economically or politically, and as we go to press there is still room for them to be rolled back. If not, the political impact is likely to be very negative for Trump’s program, as the rise in prices (gasoline and some food items) will have high visibility in the mainstream media and put pressure on some legislators. Trump needs GOP unanimity to get his tax plan through, and extended tariffs can put a significant monkey wrench into his plans.

We’ll be watching this week’s data closely—especially the tariffs and the labor report— and comment on these next week.