Weekly Research Briefing: A Bump In The Road
This weekend, DeepSeek, the Chinese AI startup, put out a product news release that had the same impact on the markets as throwing a spike strip onto the I-5 freeway during the morning rush hour. Two and three standard deviation moves lower were seen across the spectrum of AI/Cloud/Data Center/Power participants. DeepSeek claims that its comparable large language model was trained and operated for a fraction of the price. While many questions remain over the creation, uniqueness, accuracy and safety of DeepSeek, the signal it sent to the market is that even the most upward vertical industry in the world is not immune to investor over enthusiasm. DeepSeek may quickly fall by the wayside, but the number of investors wanting a clearer roadmap to a return on their AI spending just increased significantly.
The sharp move lower in the stock market's most favorite themes and largest companies sent a quick reminder to those invested in the market capitalization weighted indexes. At midday on Monday, the S&P 500 index was underperforming its equal weight counterpart by 200 basis points and many more stocks were higher than lower. Dollars deflating out of the AI themes found their way into cash flowing equities in healthcare, consumer and real estate, as well as stable yielding fixed income investments like bonds and preferred stocks. One can clearly see the excitement in active equity managers today as they hope the DeepSeek news will return the market to one of fundamental research and individual stock picking versus blind index following. We will see how passive investing will navigate this new speed bump in the weeks ahead.
In other weekend events, if you needed any evidence that tariffs will become weapon number one for the new White House, then you got it. U.S. coffee drinkers, florists and corn farmers became sacrificial pawns in this weekend's immigration spat with Colombia. Luckily for fans of Valentine's Day, the spat lasted only one day, and the Colombian government sent their planes to fly home their visiting expats. Now onto the bigger chess game with Canada and Mexico.
There is a very big week ahead for the equity markets with over 35% of the market cap of the S&P 500 reporting this week, including the companies of all of the inauguration seated CEOs. Expect longer conference calls for any company selling into an AI theme. You can guess the management spin will be that more efficient AI will lead to increased AI usage. So, the follow up questions should all be various forms of "Show Me The Money!". Feel free to add the Cuba Gooding Jr. emphasis given that the Super Bowl teams are now set. In addition to earnings, the market is also looking forward to the FOMC meeting on Wednesday and the PCE inflation reading on Friday. Enjoy the busy week.
Expect lots of deconstructing and testing of the DeepSeek model...
The major players knew about DeepSeek but have remained committed to rapidly increasing their AI capex spending anyway. Even Meta upped its 2025 spending target to the $60-65 billion range over the weekend. It is one thing for a consumer to use a cheaper but maybe equal AI search engine made in China. It is an entirely different thing for a company, government or institution to do the same. But until we have more answers, comments from the leaders in tech will likely help move AI stock prices around for awhile.
“To see the DeepSeek new model, it’s super impressive in terms of both how they have really effectively done an open-source model that does this inference-time compute, and is super-compute efficient…Jevons paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can't get enough of.” - Microsoft CEO Satya Nadella
“Deepseek is now #1 on the AppStore, surpassing ChatGPT—no NVIDIA supercomputers or $100M needed. The real treasure of AI isn’t the UI or the model—they’ve become commodities. The true value lies in data and metadata, the oxygen fueling AI’s potential. The future’s fortune? It’s in our data” - Salesforce CEO Marc Benioff
AI has been important to the Mag-7 revenues, earnings and market caps...
This chart helps to explain why DeepSeek is having such an immediate impact on the market.
(Yardeni Research)
The timing of DeepSeek was perfect as investors will have the ears of most major technology companies this week...
(Earnings Whispers)
So far, the Q4 earnings season has been a strong one...
BoA: Following a light week, 78 S&P 500 companies reported 4Q results so far, representing 22% of index earnings. Reported EPS topped consensus by 8%, better than last quarter’s 5% beat after Week 2. The beat was led by Financials, which beat consensus by 16% (+2% vs. consensus ex-Financials). 72%/64%/56% beat on EPS/sales/both so far, well above the historical average of 64%/59%/45% but mixed vs. last quarter’s 76%/63%/55%.
(Neil Sethi)
GE Verona may have declined 21% on Monday as a result of DeepSeek flight, but their earnings comments last week were electric sending the stock to a $100b+ market cap...
"In electrification, demand for our products remain strong with equipment orders more than doubling in 4Q 2024 compared to last year as customers modernize and invest in critical grid components such as transformers, switch gears and HVDC systems, which are essential to ensuring a reliable electricity system and effectively connecting new generation sources." – GE Vernova Scott Strazik
Netflix subscriber addition was another sign of a strong U.S. consumer and increasing global reach...
"We generated 19M paid net additions - the biggest quarter of net adds in our history - compared with 13M in Q4’23 and 5M in Q3’24." – Netflix
Ally saw better credit trends in auto lending which is a pleasing datapoint for any consumer facing business...
"We're seeing improving trends in consumer performance. Retail auto net charge-offs of 234 basis points were up 10 basis points quarter-over-quarter. Typically, we would expect approximately 35 basis points of quarter-over-quarter increase tied to seasonality." – Ally Financial CFO Russell E. Hutchinson
Another positive luxury goods datapoint as Burberry store comps were better than expected...
Luxury brand Burberry sees signs of progress as its turnaround strategy gains traction. Q3 retail revenue hit £659M, down 3% YoY, but better than expected. Comparable sales fell 4% (vs. -13% forecast). Strong festive sales in outerwear and scarves signal positive momentum, though macro uncertainty persists. Early days, but a promising start under CEO Joshua Schulman.
A top U.S. trucking industry player noted several positive trends...
"While current freight market conditions have been choppy, we are encouraged by customer sentiment, seasonal spot rate progression, the continued erosion of capacity, and early bid season activity - all of which point to a more balanced market than we have seen in roughly three years...we anticipate 2025 will be a year of gradual recovery in market conditions that bridges to a more constructive 2026." – Knight-Swift Transportation Treasurer Brad Stewart
And not just trucks, but rail volume trends are also rolling higher...
Intermodal demand is soaring year to date (+14.0%) outpacing the more commodity rail volumes (+3.4%) which are still growing faster than GDP.
Optimism on earnings calls has reached a new high...
The bar is being raised with 1/3 of earnings so far reported. Let's see if the rest of the reports will be as optimistic.
As you already know, U.S. travel to Europe this summer will be even crazier than last year...
Book early, set reservations and always have a 'Plan B' ready to go.
"The strong dollar is absolutely going to have an impact on buying and travel to Europe this summer. So we take a look to March, and as we look to some of our peak periods, spring break and getting into the summer, I see robust demand across the board." – American Airlines Group President Robert D. Isom
Speaking of Europe, their broader index finally broke out to new highs...
Europe's STOXX 600 is now overbought, but the real message is that it has punched through resistance to make a new high.
Combine the index breakout with a significantly cheaper valuation and a shift away from the Mag-7 and just maybe this is just what le docteur ordered...
Meanwhile, as one banker noted last week, M&A backlogs are large...
"Our M&A backlog right now is about as large as it's ever been, and there's still a whole bunch of capital on the sidelines." – KeyCorp CEO Chris Gorman
January deals to date are +20% over last January... 
(Goldman Sachs)
Large public company deals continue to hit the tape...
$75b market cap and S&P 100 component Emerson Electric completes its full purchase of $17b market cap Aspen Technology.
Emerson Electric Co. agreed to buy the rest of Aspen Technology that it doesn’t already own in a deal that values the industrial-software company at a fully diluted market value of $17 billion.
Emerson is paying $265 per share in cash for the 43% stake, valuing it at $7.2 billion, according to a statement Monday. That’s up from the $240 per share it offered in November.
The St. Louis-based firm already owns 57% of company after taking a majority stake in 2022 as part of an effort to accelerate its software strategy...
AspenTech offers software and artificial intelligence that optimizes asset design, operations and maintenance in industrial environments, according to its website.
Increasing M&A appetites are also leading to tax-free spins today that can lead to complementary mergers tomorrow...
Breakups are becoming all the rage on Wall Street—because they have worked.
On Wednesday, auto supplier Aptiv announced plans to split into two companies. One will supply electrical systems. Aptiv is a big supplier of electrical components to auto makers. It sells more equipment on electric vehicles and hybrids than on traditional cars.
More EVs—be they all-electric or hybrids—are being sold. Globally, about 23 million electrified cars were sold in 2024, up some 4 million from 2023.
Aptiv’s other business is more of a technology company, selling “sensor-to-cloud tech solutions.” It also supplies automotive software and hardware for systems such as autonomous driving. The company’s plan is to expand that business beyond the automotive market—sensing technology and software can go into many things...
Ideally, Aptiv’s tech business would fetch something closer to an industrial company multiple—more like 20 times—while the electrical distribution business could continue to trade like an auto supplier. Based on the distribution of Ebitda, the potential revaluation stock bump is as high as 90%. That’s the ideal scenario, needless to say.
Just loved this article by Will Leitch..."How the biggest rock band in the world disappeared"
Final album was assembled just down the street from my favorite PDX vegan restaurant. Complete news to me.
Michael Stipe turned 65 right after New Year’s. Every generation has their “our childhood heroes are how old now?” moment — jaws surely dropped when Rita Hayworth turned 65, which is the precise age she became soon after Stipe’s band, R.E.M., released “Murmur,” its first album — but there is something about this particular rock star becoming eligible for Medicare that sticks in one’s gullet. Kurt Cobain, were he still here, would be just a couple of years from turning 60 himself. So you know.
It will have been 14 years this March since R.E.M. — an Athens, Georgia, foursome that for a stretch of about five years in the 1990s was arguably the biggest rock band on the planet — released its final album, “Collapse into Now.” Six months later, the band retired, with Stipe saying, “the skill in attending a party is knowing when it’s time to leave. We built something extraordinary together. We did this thing. And now we’re going to walk away from it.”
And then R.E.M. did something more or less no other band has ever done: It stopped playing. Berry, Buck, Mills and Stipe walked away. They have played one song together in the last 14 years, “Losing My Religion,” at their induction into the Songwriters Hall of Fame, and they are explicit about it not happening again. When CBS’s Anthony Mason asked them, on a rare media appearance on “CBS This Morning” last year, what it would take for them to reunite, bassist Mike Mills said, “a comet."
Learn more about the Hamilton Lane Strategies
The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.