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An Independent Financial Advisory Firm
Magnus Financial Group LLC is an independent, SEC-registered investment management firm headquartered in New York City. We specialize in providing customized wealth management and financial planning services to a diverse clientele, including high-net-worth individuals.
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Market Commentary
Market Commentary – January, 2025
AI Wars
A record-high goods trade deficit and decline in inventories led to slower GDP growth
Overview
Markets produced compelling gains in the first month of 2025. U.S. large-cap stocks, as represented by the S&P 500 Index, ended January up 2.8% while the U.S. small-cap Russell 2000 Index gained 2.6%. U.S. intermediate-term bonds, as represented by the Bloomberg U.S. Aggregate Bond Index, ended January up a modest 0.5%.
Preliminary estimates for the fourth-quarter GDP showed the U.S. economy growing at an annualized rate of 2.3% quarter-over-quarter, slightly below the expected 2.7%.1 This slowdown was largely due to a record-high goods trade deficit and an unexpected decline in inventories.2 Consumer spending posted its strongest quarter of the year, rising by an estimated 4.2%, while government spending increased by 2.5%.1
The Fed does not seem to be in a hurry to lower interest rates
The ISM Manufacturing PMI showed manufacturing sector activity moving into expansionary territory for the first time since October 2022, registering a reading of 50.9 in January.3 The ISM Services PMI showed services sector activity continuing to grow for the seventh consecutive month, with a reading of 52.8 in January.4
After declining to 2.3% year-over-year in September 2024, headline inflation rose to 2.9% in December.5 Housing inflation continues to be the main driver of elevated inflation while energy prices have started to reaccelerate. Energy prices contributed 40% to the overall monthly increase in December, and gasoline prices increased by 4.4% in December.5
Shelter and energy were the key contributors to December’s higher CPI print
S&P 500 earnings growth is expected to rise to 14% in 2025
Nearly 50% of S&P 500 companies have reported their fourth-quarter earnings results. As the earnings season has progressed, growth estimates have steadily increased, rising from 11.8% at the end of December to 13.2% in the last week of January, marking the halfway point. The financials sector contributed the most to earnings growth, increasing 51%, followed by the communication services sector at 29%, and the tech sector at 16%.6 Full-year 2024 earnings growth for the S&P 500 is projected to reach 9.4%, driven largely by significant contributions from these three sectors.6 For 2025, earnings growth estimates currently stand at 14.3%, which would be the highest growth rate since 2021 when it exceeded 35%. Notably, the proportion of S&P 500 members outperforming the broader index over the past month rose to 52% at the end of January, a significant improvement from 20% at the end of December.7
January saw a new administration taking office, and a possible shift in the future of AI
AI Wars
The year did not start quietly. January not only ushered in a new administration taking office (and over 100 executive orders being carried out) but also a potential shift in the future of artificial intelligence (AI).
On January 20, 2025, DeepSeek—a Chinese artificial intelligence (AI) startup—launched an advanced AI model that first caught the attention of Silicon Valley, and then broader global capital markets. DeepSeek’s new model, R1, demonstrated high performance in various benchmarks, making it competitive with top U.S. AI models such as OpenAI’s ChatGPT.8,9 More importantly, the company claimed that it trained its models at a fraction of the cost of incumbent models.9,10 Venture investor Marc Andreessen called it “AI’s Sputnik moment.”11
DeepSeek has made its model more efficient than traditional AI models, while maintaining accuracy
The U.S. Navy has already banned the use of DeepSeek
There are concerns about DeepSeek’s true development costs and privacy policy. While DeepSeek claims its setup involves only 10,000 Nvidia H100 chips, reports suggest the number may be closer to 50,000. If accurate, this would align initial training costs with those of other major AI models.8,13 Nevertheless, DeepSeek’s pricing remains about 90% lower than that of OpenAI’s ChatGPT. China’s lax data privacy regulations and internet surveillance continue to draw attention, and they have become key issues for the future of the Chinese-owned social media app, TikTok, which was briefly banned in the U.S. in January. The U.S. Navy has already banned the use of DeepSeek “in any capacity” due to “potential security and ethical concerns.”14
Concerns aside, it is not DeepSeek itself, but rather its approach, that has disrupted the status quo and thrown into question the future of U.S. tech dominance. By cutting costs and enabling large-scale AI training on consumer-grade hardware, DeepSeek has lowered the barrier to entry for AI innovation. It also suggests that powerful and costeffective AI models are achievable without the immense infrastructure traditionally associated with major tech companies. It has also increased the likelihood that lower-cost models are not only possible but may be just as powerful and effective as industry-leading models.
U.S. mega-cap tech companies have no plans to slow AI capex spending yet
For now, at least, mega-cap tech companies seem to have little interest in scaling down on AI-related spending. Both Meta and Microsoft in the last week of January announced plans to spend billions of dollars on AI.15,16 After his company announced a $65 billion spending plan on AI infrastructure expansion, Meta CEO Mark Zuckerberg said:
“I continue to think that investing very heavily in CapEx and infrastructure is going to be a strategic advantage over time. It’s possible that we’ll learn otherwise at some point, but I just think it’s way too early to call that.”15
Microsoft plans to spend $80 billion on AI in its current fiscal year. Microsoft CEO Satya Nadella noted in the company’s fourth-quarter earnings call that ongoing spending would alleviate limitations that have thus far hindered the tech giant’s ability to fully leverage AI:
“As AI becomes more efficient and accessible, we will see exponentially more demand.”16
While Meta ended January up 15%, Microsoft ended the month down 0.8%.
DeepSeek has made its model more efficient than traditional AI models, while maintaining accuracy
Trump’s first day in office saw him sign over 100 executive orders
On January 20, coincidentally the same day that DeepSeek released its R1 model to the world, the Trump administration returned to the White House. On his first day back in office, President Trump signed over 100 executive actions, including rescinding 78 Biden-era orders, withdrawing the United States from the World Health Organization and the Paris Agreement, implementing extensive changes to U.S. immigration policy, and establishing the Department of Government Efficiency (DOGE).17
DOGE, which also commenced operations on January 20, was created to shed light on (and possibly lighten) the U.S. fiscal deficit, which is estimated to reach $1.9 trillion in 2025.18 Unless addressed, the U.S. government may add over $6 billion of debt every day for the next ten years—borrowing over $268 million every hour.19
DOGE claims to be saving the federal government $1 billion per day
DOGE has wasted no time in getting started. According to the department, they are already saving the federal government approximately $1 billion per day, mostly from the federal hiring freeze, eliminating DEI initiatives, and preventing improper payments to foreign organizations, per presidential executive orders.20 DOGE has begun to scrutinize and clean up the federal real estate portfolio, which has more than 7,500 leases. According to the department, landlords in Washington, D.C. that rent to federal agencies are being paid a significant premium: the average General Services Administration (GSA) office rent per square foot in Washington is $41, while the average broader D.C. office market sits at $33.21,22 This follows a 2023 Public Buildings Reform Board report that found that nearly 90% of U.S. government agency space in D.C. is going unused.23 On January 21, the U.S. Debt Clock website introduced a DOGE section to monitor the department’s efforts to cut back on federal spending.24
Another executive order, effective from January 20, put a hiring freeze on all federal government jobs. On January 28, the Trump administration sent out a voluntary resignation invitation to nearly every federal worker, offering employees continued payment until September 2025 if they resigned by February 6.25 The administration anticipates that between 5% and 10% of the federal workforce may quit, which could lead to approximately $100 billion in savings.25,26 Over the past two years, the government sector has been the second-largest contributor to job growth, adding over 1.1 million new federal employees since January 2023.
The federal government has added over 1.1 million new employees since January 2023
The U.S. healthcare sector has come under pressure for misspending
Recent reports have also revealed misspending in various government departments. For instance, the Government Accountability Office in December released a report that nearly $100 billion in improper payments were made in the Medicare and Medicaid programs in 2023 while the Department of Justice also in December sued CVS and Walgreens for filing unlawful prescriptions of opioids and seeking reimbursements from federal healthcare programs.27,28,29 The Federal Trade Commission in January sued CVS and Cigna for failing to provide requested documents related to the case.30
While these recent reports and DOGE’s efforts are small changes in the context of a nearly $2 trillion deficit, changes on the margin matter, and may eventually lead to a lightening of the U.S. fiscal burden.
Markets
International equity markets fared better than their U.S. counterparts in January. U.S. large-cap stocks ended the month up 2.8% while international developed market large cap stocks gained 5.3%. Similarly, while U.S. small-cap stocks ended the month up 2.6%, international developed market small-cap stocks ended the month up 3.5%. Emerging market stocks ended January up 1.8%, driven by strong gains in South American markets, including Brazil (+12%) and Colombia (+21%). Both U.S. intermediate-term bonds and international developed market bonds gained 0.5%.
International equity markets fared better than their U.S. counterparts in January
In geopolitical developments, on January 19, a ceasefire between Israel and Hamas came into effect. After peaking at $79 per barrel on January 16, WTI crude oil ended the month down $7, easing to $72 per barrel on January 31.
Cost-saving AI advancements and any marginal improvements on the fiscal deficit are constructive developments
Looking Forward
The incoming administration appears focused on bolstering economic growth while at the same time reducing the deficit. The most critical element of this endeavor will be curtailing the deficit and, in the process, keeping longer-term yields contained to not disrupt the economic expansion.
Although the Federal Reserve can dictate short-term interest rates through policy decisions, it has less control over longer-term rates. Since the first rate cut in September, longer-term yields have reacted with a unique vibe, moving higher than during other ratecutting cycles. That’s not to say a rise in bond yields is bad, per se, but unless it is driven by higher long-term growth prospects that translate to higher corporate earnings, rather than fiscal irresponsibility or other perceived policy errors, it could hurt risky asset valuations. It will now be up to fiscal policymakers to thread this needle. If they can, it will allow the continuation of government policies that support economic growth, which are critical for supporting equity and credit markets. Although these are disruptive to the status quo in the short term, we view cost-saving advancements in AI and progress, even if it is marginal, on the deficit as constructive developments.
Citations
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Disclaimer
Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any microeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.
This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.
Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest and do not reflect any management fees, transaction costs or expenses.
The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.
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Definitions
Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.