February 3, 2025
DeepSeek's new large language model turned AI from a scale story into a capital efficiency debate. The Nasdaq fell more than 3% after the release, while Nvidia dropped nearly 17% in one session and lost roughly $600 billion of market value. That reaction stood out because Nvidia revenue had risen 200% over two years to $126 billion, and its market value had reached $3.62 trillion in November.
The concern was not that Nvidia's current business had disappeared. Investors were questioning whether cheaper models built with lower-end chips could reduce the amount of expensive AI infrastructure needed over time. Broadcom, Micron, and TSMC also came under pressure, which shows how quickly one technology surprise can move across the chip supply chain. For recruiting, this is a useful way to discuss multiples: the earnings may still be strong, but a weaker growth runway can reset valuation.
Germany gave markets a different type of stress test. The country is the world's third-largest economy, but industrial output has fallen 15% since 2018 and manufacturing employment is down 3%. Its export share of GDP is almost four times the U.S. share and twice China's, so weaker demand for German autos and stronger Chinese competition hit the model directly. The coalition government's collapse added political uncertainty to an already difficult industrial backdrop.
The Fed also stayed cautious. Officials held the federal funds rate at 4.25% to 4.5% after inflation rose to 2.9% in December. PCE was 2.6%, core PCE was 2.8%, and the three-month PCE rate improved to 2.2%, but that was not enough to declare the job finished.
U.S. data was mixed. New home sales rose 3.6% in December to a 698,000 annual rate, with the median price up 2.1% to $427,000 and inventory at 494,000 homes. Consumer sentiment slipped to 73.2, and the goods trade deficit widened to a record $122.11 billion as companies pulled forward imports ahead of possible tariffs.
Big Tech earnings were uneven. Meta grew revenue 21% to $40.1 billion and net income 50%, Microsoft revenue rose 18% to $62 billion with Azure up 30%, Apple revenue rose only 2% as China and Mac weakness weighed, and Tesla missed EBIT expectations with 6.2% net margins. The recap is straightforward: AI remains powerful, but markets are starting to separate infrastructure winners from companies with margin, export, or valuation risk.