U.S. stocks ended a two-week rally on a tech sell-off that began early last week on anxiety over Chinese AI startup DeepSeek. The situation stabilized later in the week, but the road to recovery was bumpy on mixed corporate earnings, volatile bond yields, and anxiety over tariff proposals by Washington.
The S&P 500 ended Jan. 31 at 6,040, down 1 percent for the week; the Dow Jones closed at 44,544, up by 0.27 percent; the Nasdaq finished the week at 19,627, down 1.64 percent; and the small-cap Russell 2000 was down 0.87 percent to end at 2,287.
Wall Street traders and investors were in for a nasty surprise on the morning of Jan. 27. Tech shares sold off across the board, with Nasdaq dropping nearly 5 percent in pre-market trading.
Most losses were in AI chipmakers such as Nvidia, Broadcom, AMD, semiconductor equipment makers such as ASML Holdings and Applied Materials, and data center companies.
This sudden change in investment sentiment on Wall Street was caused by the hype surrounding a Chinese startup, DeepSeek, which says it has developed innovative, more efficient, and less expensive AI language models.
This claim challenged the narrative of massive spending on AI infrastructure, prompting a sell-off in semiconductor and data center companies, leading to a tech rally in recent months.
Traders and investors caught in the fear of missing out of the AI hype in the previous two weeks were taken by the fear of losing out mentality, selling every AI-related stock.
The situation stabilized by the middle of the week, as markets had time to examine DeepSeek’s claims more closely and conclude that they may not be as revolutionary as they sound. DeepSeek also raises security and censorship concerns as its responses closely follow Chinese regime narratives.
However, the road to recovery for the rest of the week was bumpy for several reasons. One of them was tech giants’ mixed earnings results. For instance, ASML Holdings, a European semiconductor equipment maker, beat earnings in the middle of the week, reassuring markets of the bright future of the semiconductor industry and AI.
Microsoft’s disappointing cloud and AI spending forecast raised new doubts about the future, prompting a sell-off in its shares and tapering the recovery in the tech sector.
These doubts faded again at the end of the week when Apple surprised Wall Street with record earnings for its first fiscal 2025 quarter by strengthening its competitive position in Internet services as the gatekeeper of the app universe.
For instance, labor market and GDP data released on Jan. 30 confirmed the resilience of the U.S. economy.
“The labor market is strong, and the consumer is getting stronger,” David Russell, global head of market strategy at TradeStation, told The Epoch Times via email.
“Today’s GDP and jobless claims indicate an economy poised for sustained growth throughout 2025. Inflation and rates will remain a lingering concern, but today’s numbers give investors reason for cautious optimism.”
Clark Bellin, president and chief investment officer of Bellwether Wealth, a $630 million asset-based company based in Lincoln, Nebraska, raised concerns about the Personal Consumption Expenditure (PCE) index released on Jan. 31. The index is an inflation gauge closely followed by the Fed in setting monetary policy.
“Inflation is still firmly above the Federal Reserve’s 2 percent target,” he told The Epoch Times via email.
“While Friday’s PCE print was in line with expectations, the data shows that inflation remained elevated from December to the end of 2024, making it somewhat ironic that the Federal Reserve cut interest rates during the same month. As the Federal Reserve suggested on Wednesday, with still stubborn inflation and a robust economy and labor market, more time is needed to settle down before the Fed can cut rates again.”
“Friday’s PCE report caps a very volatile week for markets, which are grappling with multiple worries, including inflation, interest rate uncertainty, but also questions about the promise of AI, which has been a significant booster of stock prices over the past two years,” Bellin said.
A third factor that added to Wall Street volatility was anxiety over President Donald Trump’s tariff proposals, which killed the momentum fueled on Friday morning by Apple’s report.
Despite the market volatility during the week, Bellin remains optimistic about U.S. equities, which managed to post gains for January, a promising signal for how the market may perform throughout 2025.
“The stock market has been on an impressive run over the past three months, and while valuations remain elevated, we believe it’s important to remain invested,” he said. “New money can be added strategically and on pullbacks.”
