S&P 500 In A DeepSeek Correction

Trump Drives S&P 500

The S&P 500 rallied to a new intraday all-time high last week after President Trump’s inauguration before pulling back on Friday.

There is no doubt that expectations surrounding the Trump administration were driving stock markets, commodity markets, and cryptocurrency markets.

The sentiment turned bullish last week, moved out of extreme fear, and is now firmly in the neutral zone.

S&P 500 Volatility

Expect more volatility this week as mega-cap stocks join the list of companies reporting earnings for the last quarter. To add to the volatility, the Federal Reserve announces its interest rate decision on Wednesday, the GDP growth rate is reported on Thursday, and the Personal Consumption Expenditures (PCE) report, a key indicator of inflation, is reported on Friday.

Earnings reported for the last quarter look strong, broadly beating expectations. Market analysts expect an earnings increase of 9.6%, and so far, reported earnings are up 10.7%.

Note: 42 companies in the S&P 500 have reported earnings with 81% beating earnings expectations.

S&P 500 And DeepSeek

That said, the emergence of the Chinese AI startup DeepSeek will impact mega-cap performance this week as earnings and valuations will be scrutinised more closely.

The dominance of tech stocks in the S&P 500’s earnings is a significant factor. Any deviation from their earnings and/or guidance expectations can instil a sense of unease in the market.

More specifically, the return on capital expenditure on AI projects is receiving more attention.

AI Capital Expenditure

In our 13 January post, “S&P 500 Needs AI To Deliver Earnings In 2025”, we noted:

“Investors want to see returns on AI investment by the end of 2025 or early 2026. They want to see business models and lifestyle changes driven by AI in the next twelve to fifteen months that drive the returns on investment.

If that doesn’t happen, then the momentum of mega-cap stocks may turn.

It was the absence of returns on invested capital that crashed internet stocks.”

When quarter three earnings were reported, Meta and Microsoft had good earnings and solid guidance; however, the market didn’t like the capital expenditure projections for AI development and the lack of clarity regarding when there would be return on that investment. Both stocks saw a pullback after their earnings release.

The emergence of DeepSeek will shine a spotlight on mega-cap stocks and the return on AI capital expenditure.

S&P 500 And Interest Rate Cuts

Interest rate cuts are a significant determinant of stock performance in the S&P 500. While the probability of a rate cut by the Federal Reserve on Wednesday is very low, the market’s sensitivity to the Fed’s narrative after the announcement cannot be overstated. This is a key event to watch this week.

S&P 500 Key Levels

The S&P 500 opens today in positive gamma. The gamma flip zone is 5965, call resistance remains 6100, and put support is 5860.

The call resistance hasn’t moved up, which signals resistance at this level.

The S&P 500 will likely see a correction to the downside today and this week as markets digest the impact of DeepSeek’s emergence and its implications for AI stocks.

Click on the Journal link below to read more about the factors currently driving the economy, the stock market and Bitcoin.

Link: JOURNAL