MONTHLY MARKET MUSINGS

January 2025

Starting The New Year Off With A Bang

So far, 2025 has seen a step-up in volatility with tariff concerns, the recent shake-up in the technology space and questions surrounding the path of monetary policy in Canada and the U.S.

We recently saw a setback in technology stocks following news that China-based AI (artificial intelligence) company, Deepseek, claimed to have produced a significantly cheaper Generative AI application that has outperformed other U.S. AI applications and has done so using less computing power. The implications are that similar levels of performance could potentially be achieved with a smaller amount of less powerful chips and less energy would be required for the servers overall. If this true, the concern is that the current implied demand for chips is too high and too much revenue is being priced-in to the shares of tech companies. On top of this, it would signal that there was an overspend by the mega-cap U.S. tech firms on AI and going forward their capital expenditure allocation to AI could drop. The market reacted negatively to this news, but potentially cheaper AI is not necessarily a bad thing for many companies. The goal of AI is to create an intelligent system that can essentially originate ideas, solutions and concepts by itself and teach itself when required in the same manner a human can. This is sometimes referred to as AGI (artificial general intelligence), this is inherently different than Generative AI which is mostly creating content (art, music, text, etc.) through pattern recognition and mimicking. In any case, even with a possible decrease in demand for chips required to power Generative AI, there is still a significant need in the AGI space. This means that the chip demand issue could likely be more of a reallocation of resources rather than a reduction of needed resources. With earnings season recently starting, it is likely that as the technology sector names report their earnings, they will comment on the Deepseek news to offer some insight and calm the waters by reinforcing that the demand for chips remains robust. Q4 results, in general, have been quite good thus far and while the technology sector has had only a handful of names report, most have put up pretty solid earnings and the expectations continue to point towards positive outcomes for the rest of them.

The U.S. Federal Reserve bank (Fed) continued to pause its interest rate cutting cycle in the first meeting of 2025. Meanwhile, the Bank of Canada (BoC) moved forward with another 25-basis point cut. The BoC is likely to stay more vigilant with the tariff situation beginning to unfold as they may need to step back in with more larger interest rate cuts to support the economy and exporters if the tariffs remain in place for any long drawn-out period of time. With the announcement over the weekend, the tariffs will be applied to most goods at 25% with the exception of oil which, as of now, has been threatened with a potential 10% tariff. We continue to think that the tariffs are unlikely to remain place in any permanent capacity and it is still just a starting point for a broader trade negotiation. As is typical with trade wars, the economic fallout from these type of situations leads to both parties being worse off in the end. While the legality of the situation, especially 25% tariffs, is still being debated, some U.S. Congress members begun to put forth a bill to block the tariffs from being applied to allies and trading partners[1]. Canada has retaliated with its own tariffs against U.S. imports. We think when all the chest puffing is done, cooler heads will hopefully prevail, and an agreement and concessions will be reached. As we have noted previously, President Trump sees prosperous financial markets as an indicator of success in his role as President, so it seems that it would be out of character for him to intentionally negatively impact the markets for any sustained period of time. While the tariffs will likely remain an overhang in the markets until a resolution is determined, the increased volatility can create opportunities for investors who are willing to ride out the ebbs and flows of the markets. We would advocate that investors try to see past the current noise and focus on the bigger picture within the investing landscape.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com