London Pre-Open: Stocks to Nudge Down After US Tech Selloff

As we approach 2025, we believe several important economic indicators point to a robust economy and broadening earnings growth.

U.S. GDP is expected to grow at a 3.2% annualized pace in Q4 2024.1 The consumer spending outlook remains strong and is well supported by accelerating real disposable income growth.2 In addition, U.S. household net worth increased by $13 trillion in just the first nine months of 2024, likely encouraging consumers to spend more in 2025 because of the wealth effect.

Stimulative financial conditions and fiscal policy could also add to growth in 2025, in our view. Global central banks remain highly coordinated in easing monetary policy: Of the 61 central banks we track, only four are increasing interest rates; in our view, this is the most market-friendly backdrop outside of recessions in three decades.Additionally, we believe potential fiscal easing in China and Europe,rebounding capex, inventory restocking, the likely ending of a two-year-long global industrial recession, and rising animal spirits in the U.S. could provide a solid backdrop for broadening earnings growth (see figure 1).

This setup continues to support our overall investment thesis (discussed in last quarter’s report), and is a far cry from 2022 – 2023, when the specter of recession loomed large.

We believe mergers and acquisitions (M&A) are set for a big comeback, thanks to a mix of supportive economic and financial conditions, as well as a more favorable regulatory regime.

Historically, M&A activity tends to rise during the 12 months after an equity bull run (with a correlation of +68% from 1998 to 2024). With the S&P 500 having delivered 20%-plus returns for two straight years, we expect a meaningful boost in M&A activity in 2025.

Several positive M&A drivers have been aligning: Interest rates are stabilizing; corporate bond spreads are narrowing; M&A-related bond issuance is on the rise; and the ISM Manufacturing Index is recovering. Typically, as financial conditions ease and industrial activity strengthens, dealmaking tends to pick up.

On the regulatory front, we believe market-friendly policies could also boost M&A. Over the last four years, M&A activity has dropped by a third compared to the previous four years, largely due to strict regulatory and anti-trust measures under the Biden administration. We believe this has created significant pent-up demand for corporate M&A.

We expect business-friendly leadership at the SEC and FTC next year, likely leading to fewer investigations, a slower pace of new regulations and subsequently increasing M&A activity. Increased M&A activity could boost confidence among CEOs and CFOs; encourage more corporate and investor risk-taking; energize deal-making and underwriting; and enhance American companies’ long- term dynamism and competitiveness. Indeed, we believe this trend has already begun, as M&A premiums have been on the rise.

Finally, we note that the multi-strategy “event-driven” category of hedge funds, which focus on deep-value exposures and speculate on potential M&A deals, has been among the top-performing hedge funds since October. We believe this trend has room to run and that investors should consider including Event Driven Merger Arbitrage hedge funds in their portfolio mix.

The representation of service-based companies in global stock markets has grown significantly with rapid growth in the social media and technology sectors. However, manufacturing continues to be a crucial driver for goods-oriented sectors, which tend to dominate value and small-cap indices.

Global industrial activity has been on a downswing for more than two years, a trend that has favored growth-oriented and large- cap stocks, both of which are inherently less sensitive to industrial activity. But recent data suggest to us that global industrial activity will gain momentum and the manufacturing recession will end in 2025, giving way to a multiyear industrial recovery, a potential tailwind for value stocks and small caps.

We believe there are fundamental reasons to expect strengthening industrial production; for example, the corporate restocking cycle (highlighted in our 4Q 2024 Equity Market Outlook) remains robust as companies continue to replenish inventories, further boosting industrial activity. We also think that strong retail sales, potentially improving demand in mainland China, and a rise in imports (following U.S. port strikes and weather disruptions) should continue to support industrial activity in the near term.

Improving corporate capex, a major component of industrial production, has the potential to sustain this trend. Historically, capex has lagged behind earnings growth and business confidence by about nine months; both have recently moved higher, which is supportive of future capex spending. As uncertainty surrounding the U.S. presidential election has faded and policy direction has clarified, companies appear increasingly comfortable about committing funds to capex: Goldman Sachs forecasts capex growth to accelerate next year and grow 2.6 times faster than U.S. GDP.

To us, these collective observations suggest early signs of a return to the traditional manufacturing economy—a shift that we believe favors a rotation from growth stocks into value stocks, and large caps into small caps (see figure 2).

While we remain optimistic about U.S. equities in 2025, we acknowledge several underlying risks that could challenge the market’s overall performance, as well as our style, size and sector recommendations.

Even as earnings growth has begun to broaden across the equity market, many investors are still enamored of the mega caps. The gap in reported earnings growth between the 10 largest stocks in the S&P 500 Index and the other 490 has recently expanded to nearly 40%—a level exceeded only once in four decades (see the left side of figure 3).

Our base-case scenario assumes that the extraordinary growth gap between the top 10 stocks and the rest will diminish to more typical levels in 2025 as industrial activity accelerates and economic growth broadens (see the right side of figure 3). However, if earnings are late to broaden or global capex expenditures are late to pick up, we fear the growth gap could remain elevated, potentially posing a significant risk to our recommended tilt toward value stocks and small caps over growth stocks and large caps.

U.S. households currently have a higher proportion of their net worth allocated to equities relative to cash than at any time since records began in 1951, except one quarter at the peak of the dot-com bubble. At these elevated allocations, we fear the stock market could be more sensitive to negative corporate and geopolitical news surprises in 2025 than is normally the case.

At the sector level, Technology, which now accounts for 32% of the S&P 500 by market cap, has a beta of 1.6—the highest among all sectors. Compounding this risk: discretionary managers’ positioning in Technology is now at a bullish 93rd percentile, meaning their relative exposure to that specific sector has been higher only 7% of the time since 2010.

In terms of style, the protracted outperformance of high-quality stocks relative to value stocks is reaching a level not observed in 26 years. We fear this shift has introduced a subtle risk: High-quality stocks—traditionally considered safer than the broader market— now have a beta exceeding 1.0, making them riskier than the overall S&P 500 Index.

We worry these trends have made the broader equity market particularly vulnerable to a shift in investor sentiment away from growth stocks, potentially caused by earnings disappointments in the tech sector or a broadening of economic growth.

The significant divergence in real interest rates across the developed world has made carry trades particularly lucrative over the past three years. Carry trades involve borrowing in a low-yielding currency, such as the yen and Swiss franc, and investing in a higher- yielding currency or even global growth stocks, thereby capturing a spread.

Consider the current differential between the USD and JPY policy rates, as shown in figure 4: As the Fed looks to ease while the BoJ aims to hike, we expect the Japanese 2-year rates to rise relative to those in the U.S. This would make the carry trade increasingly unattractive.

The yen carry trade has been a significant contributor to the exceptional performance of mega-cap growth stocks and remained a significant support for the NASDAQ 100 in the second half of 2024. The reversal of carry trade, in our view, could pressure growth stocks and create volatility across the broader stock market.

There is precedent for this: The yen rose against the USD in early July, prompting a rapid unwinding of the carry trade. Investors sold growth stocks and bought yen, which resulted in a swift 13% correction in the Russell 1000 Growth index within a three-week period.23 In short, we suggest investors monitor developments in the carry trade over the course of 2025.

While our investment style recommendations remain the same from last quarter (see our 4Q 2024 Equity Market Outlook), we have slightly adjusted our sector and regional allocations.

Communication Services and Consumer Discretionary: Upgrading to Overweight

Healthcare: Downgrading to Neutral

Energy: Downgrading to Underweight

We believe the recovery in corporate and consumer spending should drive demand for goods and services, including media, telecom and entertainment, while lingering policy uncertainty could pressure the energy and health sectors.

India: Downgrading to Underweight

We believe signs point to a shift in sentiment to China from India. Improving corporate profitability and greater dissaving among Chinese consumers have made us increasingly constructive on Chinese equities. In India, by contrast, the pace of earnings downgrades is increasing and macro momentum slowing, while valuations remain stratospheric and allocations elevated.

For detailed recommendations across sectors, factors, styles and geographies, see the section titled “Investment Themes and Views.”

Asian shares were mixed in thin Lunar New Year trading on Tuesday after Wall Street’s tech superstars tumbled as a competitor from China raised doubts over the recent artificial-intelligence market frenzy.

Japan’s benchmark Nikkei 225 lost 1.5% to 38,959.05. Australia’s S&P/ASX 200 was little changed, inching down 0.1% to 8,399.10. Hong Kong’s Hang Seng rose 0.1% to 20,225.11. Markets in South Korea, Shanghai markets and other parts of the region were closed for holidays.

Among technology companies in Japan, SoftBank Group Corp. stock extended its losses, plunging 6%. Hitachi Ltd. lost 7%, but Fujitsu and Sony Corp. recovered. Computer chip maker Tokyo Electron sank 5.5%.

Fuji Media Holdings, rocked by a sex scandal, rose 1% after a marathon news conference overnight by its top executives that lasted more than 10 hours, in which two of them resigned to take responsibility for the scandal. Fuji’s stock price has zigzagged in recent months amid Japanese magazine reports about “a problem” involving an anchorwoman and a Japanese male star. He has subsequently announced his retirement.

On Monday, the S&P 500 dropped 1.5% to 6,012.28, dragged down in large part by a 16.9% fall for Nvidia. Other Big Tech stocks also took heavy losses, pulling the Nasdaq composite down 3.1% to 19,341.83 for its worst loss in more than a month.

The damage was focused on AI-related stocks, while the rest of the market held up much better. The Dow Jones Industrial Average rose 0.7% to 44,713.58, and the majority of U.S. stocks climbed. But anyone holding an S&P 500 index fund, which are found in many 401(k) accounts, felt the pain because of how influential those tech giants have become on indexes.

The shock to financial markets came from China, where an AI company called DeepSeek unveiled a large language model that can compete with U.S. giants but at potentially a fraction of the cost. DeepSeek had already hit the top of the chart for free apps on Apple’s App Store by Monday morning, and analysts said such a feat was particularly impressive given how the U.S. government has restricted Chinese access to top AI chips.

It’s unclear, however, how much DeepSeek’s announcement will ultimately shake the economy that’s built around the AI industry, from the chip makers making semiconductors to the utilities hoping to electrify vast data centers gobbling up computing power.

“It remains to be seen if DeepSeek found a way to work around these chip restrictions rules and what chips they ultimately used as there will be many skeptics around this issue given the information is coming from China,” according to Dan Ives, an analyst with Wedbush Securities.

DeepSeek’s disruption nevertheless rocked AI-related stocks worldwide.

It’s a sharp turnaround for the AI winners, which had soared in recent years on hopes that all the investment pouring in would remake the global economy and deliver gargantuan profits along the way. Such stellar performances also raised criticism that their stock prices had gone too far, too fast.

Before Monday’s drop, which was its worst since the 2020 COVID crash, Nvidia’s stock had soared from less than $20 to more than $140 in less than two years, for example.

A small group of seven such companies has become so dominant that they alone accounted for more than half the S&P 500’s total return last year, according to S&P Dow Jones Indices. They include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

Their immense sizes give them huge sway over the S&P 500 and other indexes that give more weight to bigger companies.

Markets are also awaiting earnings reports later this week from Apple, Meta Platforms, Microsoft and Tesla.

In energy trading, benchmark U.S. crude added 36 cents to $73.53 a barrel. Brent crude, the international standard, rose 42 cents to $77.50 a barrel.

In currency trading, the U.S. dollar rose to 155.71 Japanese yen from 154.51 yen. The euro cost $1.0441, down from $1.0493.

The U.S. dollar has continued to defy gravity, rising 7% in 2024 despite two Fed rate cuts. While the DXY Index peaked in September 2022, the U.S. real broad effective exchange rate (REER), which measures the dollar’s value relative to a broad basket of currencies adjusted for inflation differentials, remains near all-time highs. Dollar strength is expected to stabilize or persist into 2025 for several reasons:

1.Economic growth differentials: The U.S. economy is projected to grow by 2.7% in 2024, outpacing the 1.7% growth forecast for all developed markets. This is driven by superior productivity growth, higher business investment and fewer labor supply issues compared to other developed markets. Such robust growth, which has contributed to inflation remaining above 2%, may lead the Fed to halt rate cuts sooner than expected. This makes a dollar weakening unlikely in the short term.

2.Monetary policy differentials: The increasing divergence in global growth has led to a greater disparity in central bank policies worldwide. As a result, the gap between U.S. 10-year bond yields and those of its key trading partners has widened to its highest level since 1994. These differentials may remain elevated, as markets are currently pricing in only a limited number of Fed cuts next year (44bps), compared to 110bps for the ECB and rate hikes of 47bps in Japan.

3.Policy changes: The upcoming administration's focus on boosting domestic manufacturing, increasing tariffs and deregulating industries could spur business growth and sustain higher interest rates, supporting the dollar. President-elect Trump has also discussed imposing tariffs or other measures on countries that challenge the dollar's trade dominance or reserve currency status.

Even with the factors supporting the dollar, its ascent is unlikely to continue indefinitely. Currently, the dollar is two standard deviations above its 50-year average, suggesting limited room for further appreciation. Historically, the dollar has alternated between periods of strength and weakness, making a downturn likely at some point, though the timing is uncertain. Additionally, the U.S.'s persistent trade balance deficit, at 4.2% of GDP as of September 2024, poses a long-term constraint, highlighting a structural challenge that could eventually pressure the currency.

A strong dollar can hurt international company performance for U.S.-based investors. It can also negatively impact U.S. companies with significant international exposure and U.S. exports by making goods more expensive abroad. While a stronger dollar could bolster the 'U.S. exceptionalism' narrative in 2025, investors should carefully assess its potential impact on their portfolios.

Runs have plagued the banking system for centuries and returned to prominence with the bank failures in early 2023. In a traditional run—such as depicted in classic photos from the Great Depression—depositors line up in front of a bank to withdraw their cash. This is not how modern bank runs occur: today, depositors move money from a risky to a safe bank through electronic payment systems. In a recently published staff report, we use data on wholesale and retail payments to understand the bank run of March 2023. Which banks were run on? How were they different from other banks? And how did they respond to the run?

Banks send most large payments through the Fedwire Funds Service (from now, Fedwire), which moves money between banks’ accounts at the Federal Reserve. When depositors run on a bank and wire large amounts of money to other banks, the run-on bank suffers large and unusual payment outflows but no compensating inflows. To check for unusual outflows in March 2023, we standardize each bank’s daily net payment flows by subtracting the mean and dividing them by their standard deviation. The chart below shows the most extreme payment flows between January 1 and March 31, 2023, by plotting the 1st, 5th, 95th, and 99th percentiles of the daily cross-section of standardized net payments for a sample of banks that are active in Fedwire. As the chart shows, the 1st percentile drops significantly on Friday, March 10—following the run on Silicon Valley Bank (SVB)—and on Monday, March 13, which means that 1 percent of sample banks suffered unusually large outflows on these two days. Even the 5th percentile of net payments notably declines on Monday, March 13. The outflows stop on March 14 with the runs stopping just as quickly as they started. In other words, the March 2023 run was very short-lived, with banks suffering highly unusual outflows over a period of only two days.

Were Run We identify run-on banks as those banks whose net payments were more than five standard deviations below normal during the four business days window from Thursday, March 9, to Tuesday, March 14. Using this method, we identify twenty-two run-on banks, five of which suffered a run on Friday and nineteen on Monday (so two suffered a run on both days); this is far above the number of banks which failed during the episode (only two). The value of outgoing wire transfers from these banks more than tripled on the run days. Furthermore, the average size of run payments was more than three times what would have been expected absent the run, confirming that the run was mainly initiated by larger depositors.

In the table below, we show the key differences in the balance sheets of run and non-run banks as of the last regulatory filing before the run (2022:Q4), highlighting the fact that bank runs have both fundamental and panic elements (Goldstein 2013). Run banks had significantly lower tier-1 capital, consistent with the idea that depositors run on a bank when they are concerned with the bank’s fundamental solvency. Run banks also had significantly lower cash holdings, consistent with the idea of liquidity-driven runs as depositors try to withdraw before the bank is out of cash. Further, run-on banks had significantly more uninsured deposits and these were significantly more concentrated, consistent with the presence of stronger panic element when there are “large players.” (Corsetti et al. 2004). Finally, run-on banks were overwhelmingly banks that are publicly traded on the stock market; this points to a role for public information that we will discuss in a subsequent blog post.

Importantly, however, the characteristics of run banks and non-run banks significantly overlap. For instance, at least 25 percent of banks in both groups have cash holdings lower than 2 percent as a share of their assets; we find similar results for all the characteristics associated with run behavior we discussed above. While we can relate the occurrence of runs to specific characteristics consistent with fundamental and panic elements, a notable unexplained component therefore remains, consistent with a “sun-spot” element that is impossible to predict.

In most bank run models, banks respond to deposit outflows by first using up their cash and then selling their assets. Asset sales make systemic bank runs damaging because many bank assets are illiquid and fire-selling them causes spillovers to other banks. This, however, is not what happened in March 2023. The figure below shows, separately for run and non-run banks, the changes in banks’ balance sheets from the Wednesday before the run to the Wednesday after, based on bank-level data.

As the figure shows, almost all run banks responded to the deposit outflows by borrowing new funds from other sources. In fact, they borrowed so much that 75 percent of run banks increased their cash balances in the week of the run, that is, they more than offset the deposit outflows.

The next figure shows the sources of the change in banks’ cash balance at the Federal Reserve over the same one-week period.

Almost all run-on banks borrowed from Federal Home Loan Banks (FHLBs), whereas only a few borrowed from the discount window (including the newly established Bank Term Funding Program); those that did borrow from the discount window, however, borrowed in large amount. This is consistent with banks using the discount window only as their lender of last resort, to be tapped only when funds from FHLBs are not available.

In a recently issued staff report, we use payments data to study the March 2023 bank run. We find that the run was concentrated on only two days and was driven mainly by a relatively small number of large depositors. However, a large set of banks were run on, far in excess of the banks that ultimately failed. Although run-on banks had on average worse fundamentals, there are large overlaps between the balance sheet characteristics of run and non-run banks. Banks react to their run by increasing their borrowing, mainly from FHLBs and only as a last resort from the discount window.

MicroStrategy Inc. bought Bitcoin for a 12th consecutive week and unveiled details for the sale of perpetual preferred stock to help finance additional purchases of the cryptocurrency.

The Tysons Corner, Virginia-based enterprise software company turned leveraged Bitcoin proxy acquired $1.1 billion of the digital currency from from Jan. 21 through Jan. 26, according to a filing with the US Securities and Exchange Commission on Monday. It owns about $47 billion of Bitcoin, or over 2% of all the tokens that will ever exist.

MicroStrategy is offering an 8% fixed coupon for its $250 million of perpetual strike preferred stock, according to people familiar with the matter. The stock is being offered with a $1,000 conversion price, the people said, asking not to be identified as the information isn’t public. A representative for MicroStrategy didn’t immediately respond to requests for comment.

Co-founder and Chairman Michael Saylor has been ramping up MicroStrategy’s purchases of the cryptocurrency since the election of US President Donald Trump, whom Saylor called “The 1st Bitcoin President,” in a post on X.

The company has been using at-the-market stock sales and convertible debt offerings to fund Bitcoin purchases with the aim of raising $42 billion of capital through 2027.

Hedge funds have been helping to drive the demand as they seek out MicroStrategy for convertible arbitrage strategies by buying the bonds and selling the shares short, essentially betting on the underlying stock’s volatility.

MicroStrategy shares have risen around 600% in the past year. The stock fell about 1.4% to $348.65 as of 9:50 a.m. in New York. Bitcoin fell around 2.5% to $101,953.

Over $1 billion of those convertible notes will now be redeemed earlier than expected. MicroStrategy announced on Friday that its outstanding 0% Convertible Senior Notes due in 2027 will be redeemed on Feb. 24. Notes will reflect a conversion price of $142.38 per Class A common share, according to a statement. The shares closed at $353.67 on Friday.

“Taking maturities out and lengthening that runway will allow investors to focus on what the company is doing rather than on potential impediments to the execution of its strategy,” said Benchmark analyst Mark Palmer, who has a “buy” rating on the stock.

Redeeming these notes early could also allow the company to continue to raise more capital.

“Taking one convert out with a near-term maturity does at least theoretically position the company to be in position to issue another convert with a longer dated maturity, but there are other options that the company has with regard to raising capital, including perpetual preferred stock,” Palmer said.

MicroStrategy plans to offer 2.5 million shares of Series A perpetual strike preferred stock at a liquidation preference of $100 per share. The preferred stock will be senior to Class A common stock and offer a regular quarterly dividend beginning on March 31, according to a SEC filing. The firm announced earlier this month that it planned to raise as much as $2 billion from perpetual preferred offerings in the first quarter.

The company may also opt for more equity offerings after shareholders approved increasing the number of Class A shares 30-fold. The results of the vote on Tuesday allows the company to increase the number of authorized shares of its Class A common stock from 330 million to 10.3 billion and increase the number of authorized shares of preferred stock from 5 million to 1 billion.

MicroStrategy currently has $4.35 billion left of equity offerings under its $42 billion capital plan. Increasing share sales could allow the company to continue to fund additional Bitcoin purchases and cover expenses without having to sell tokens.

“We’ve had and expect to continue to have ample access to liquidity through our capital markets activities and cash flows from operations,” Saylor said in the shareholder vote meeting. “We haven’t sold and don’t intend to sell our Bitcoin to satisfy our interest obligations as they become due.”

Asian traders braced for a turbulent Tuesday, following a bruising session on Wall Street as cracks appeared in the artificial intelligence sector powering the bull market.

A selloff was triggered after a cheap AI model from Chinese startup DeepSeek climbed to the top of Apple’s appstore, sparking concerns that valuations of the technology may be tough to justify. The S&P 500 dropped 1.5% and the Nasdaq 100 sank 3%.

The dollar gained against its Group-of-10 peers as US President Donald Trump said he’ll soon put tariffs on foreign-produced semiconductors, pharmaceuticals and some metals in order to compel producers to manufacture in the country. Scott Bessent, whom the Financial Times said backed gradual universal levies, was confirmed as the next Treasury Secretary.

US equity futures were steady early Tuesday. While Chinese markets are closed for the rest of this week, contracts show Tokyo equities may slump more than 1%, as Sydney stocks were little changed.

“What was shaping up to be a big week in the markets got even bigger with the disruption in the AI space,” said Chris Larkin at E*Trade from Morgan Stanley. “That could make this week’s megacap tech earnings even more critical to market sentiment.”

Monday’s AI plunge drove new fissures into a market narrative that prevailed since the re-election of Donald Trump in November, the America-first, tech-fueled uber bullishness that saw a clear upward path for risky assets spurred by deregulation, tax cuts and even government sponsorship of AI investment. Treasury yields slid sharply as haven-seeking investors laid aside concern - for today, anyway - that the new president’s policies will stoke inflation.

On Monday, Japan’s chip-related shares including Advantest Corp., SoftBank Group and Furukawa Electric Co. got caught in the global tech selloff.

The yield on 10-year Treasuries declined nine basis points to 4.53% on Monday. Australia’s 10-year yield fell six basis points in early Asia trading Tuesday. The Bloomberg Dollar Spot Index rose 0.3%, extending Monday’s gains. Bitcoin slid 2.9% to $101,481.84.

The severity of the rout in US assets was proportionate to the weightings of AI-enabled firms in the biggest stock indexes. Even after a recent paring to curb their influence, the cohort of Nvidia, Apple Inc., Microsoft Corp., Amazon.com Inc., Meta Platforms Inc. and Alphabet Inc. account for about 40% of the Nasdaq 100. It’s roughly 30% in the S&P 500, leaving both gauges significantly exposed to concerted drops in those names.

“The sudden, adverse market reaction to DeepSeek indicates that some of the key assumptions that have been driving the AI trade, and hence major indices, are getting reassessed today,” said Steve Sosnick at Interactive Brokers. “Part of today’s sudden adverse market reaction was a direct result of a wave of complacency that overtook the equity market.”

The Dow Jones Industrial Average added 0.7%. A gauge of the “Magnificent Seven” megacaps slid 2.7%. The Russell 2000 slipped 1%. Wall Street’s “fear gauge” — the VIX — soared the most since mid-December to about 18.

“I’m hoping this moment encourages everyone to look beyond tech stocks,” said Callie Cox at Ritholtz Wealth Management. “Not because the AI story is doomed, but because there are so many opportunities in unloved sectors that have been ignored for so long. The guts of the market’s foundation are still good, so it’s likely that the dip will be bought here.”

Chinese investors have much to ponder as they start their Lunar New Year celebrations that last for the rest of the week. The nation’s economic activity unexpectedly faltered to start the year, breaking the momentum of a recovery sparked by stimulus measures and underlining the need for Beijing to do more to prevent another slowdown.

China’s factory activity shrank in January after three months of expansion, with the manufacturing purchasing managers’ index falling to 49.1, the lowest since August. The non-manufacturing gauge for construction and services dropped to 50.2, just above the 50-mark that separates growth and contraction.

Most Asian markets are shut for the upcoming Lunar New Year celebrations, with Indonesia, South Korea, Taiwan and Vietnam among those closed. Bourses in Hong Kong — on track to open higher — and Singapore are due to end early.

Global traders’ focus will be on earnings announcements from the likes of Microsoft and Apple this week to restore confidence in the so-called Magnificent Seven group of companies.

Investors are heading into yet another pivotal Big Tech earnings cycle with the companies’ shares near record highs and valuations stretched. A key distinction this time: The group’s profit growth is projected to come in at the slowest pace in almost two years.

“This should be a fairly good earnings season, but the bar has been raised and they may not be able to live up to high expectations,” said Dan Taylor, chief investment officer at Man Numeric. “It will be very difficult for the group to perform the way it did last year, especially as valuations have increased.”

DeepSeek was founded in 2023 by Liang Wenfeng, the chief of AI-driven quant hedge fund High-Flyer. The company develops AI models that are open-source, meaning the developer community at large can inspect and improve the software. Its mobile app surged to the top of the iPhone download charts in the US after its release in early January.

The app distinguishes itself from other chatbots like OpenAI’s ChatGPT by articulating its reasoning before delivering a response to a prompt. The company claims its R1 release offers performance on par with OpenAI’s latest and has granted license for individuals interested in developing chatbots using the technology to build on it.