Despite the upheaval in the equity markets related to DeepSeek and tit-for-tat tariffs, the most important developments within the current market landscape are the rotation of investor capital out of most of the Magnificent Seven stocks and seeing yield on the 10-year Treasury decline 4.48% from 4.80% during the past three weeks. There is still bullish sentiment in the artificial intelligence (AI) infrastructure stocks as the four largest hyperscalers announced they will spend a collective $325 billion on data centers and infrastructure in 2025, representing a 43% increase over 2024. Add the next eight hyperscalers, and spending far exceeds $400 billion, which defines a fantastic capital investment secular trend.
Hence, the building out the electric grid is still a number one priority, not just for the future demands of AI, but also because of the reshoring of U.S. manufacturing trend that is well underway, and the fact that the current grid in many regions is antiquated and in need of major upgrades to prevent outages. In this sector, there are roughly seven grid-building stocks traded within the construction engineering sector that got hit by the DeepSeek headlines but are now on the mend, especially with several reports of service disruptions and crashes of the DeepSeek app this past week.
However, with AI just as available in the hands of dark web operators and organized criminal hacking operations in China, North Korea, Russia and a host of other countries, cybersecurity stocks are demonstrating market leadership as spending to protect new vast amounts of data is a golden goose for these companies. It showed up in both their quarterly results, and more importantly, their forward guidance. Here too, there are roughly a dozen companies that dominate the sector targeting various aspects of security, where owning an exchange-traded fund (ETF) might make more sense for investors. The First Trust NASDAQ Cybersecurity ETF (CIBR) is showing excellent relative strength.
The U.S. economy added 143,000 non-farm payrolls in January 2025, missing the 169,000 median Bloomberg consensus. The three-month average for total non-farm payrolls increased to 237,000 from 204,000. December non-farm payrolls were revised to 307,000 from 256,000. November non-farm payrolls were revised to 261,000 from 212,000. Meanwhile, the unemployment rate unexpectedly improved, dipping to 4.0% from 4.1% prior. This was as average hourly earnings surprised at 4.1% against the 3.8% survey. On balance, while the economy added fewer jobs, low unemployment and strong wage growth could keep the Federal Reserve cautious regarding rate cuts.
The bond market received another negative signal regarding inflation when the preliminary reading of the University of Michigan’s Consumer Sentiment Index for February showed an increase in year-ahead inflation expectations to 4.3% from 3.3%. Looking at federal funds futures, financial markets were pricing in about 1.4 rate cuts by the end of 2025 from the Fed following the jobs report. This is down from two cuts priced in at the end of last month.
So, while other global central banks are cutting rates to fight off recessionary pressures, the U.S. bond market has maintained higher yields that are keeping a strong bid under the dollar and drawing in huge foreign fund flows. Among central banks overseeing the 10 most heavily traded currencies, five of the nine that held meetings in December cut interest rates. Central banks in Switzerland and Canada shaved off 50 basis points each, while the Federal Reserve, the European Central Bank and Sweden’s Riksbank trimmed benchmarks by 25 basis points each.
For January, The Bank of England lowered interest rates by 25 basis points, following the European Central Bank’s second quarter-point cut in as many months. On Jan. 30, the Bank of Canada cut its key rate by 25 basis points to 3.0%. The Bank of Mexico cut its benchmark rate by 50 basis points to 9.5%. And the Reserve Bank of India also cut their key repo rate by 25 basis points to 6.25%, its first cut in nearly five years on Feb. 6. Many economies seem to be settling into a lower-rate environment as policymakers look to boost economic growth.
Other sectors showing bullish price action include travel (airlines, hotels, cruise lines, booking agencies), entertainment digital content (streaming for shows, movies, music, video gaming), big box retail (general merchandise), investment banks (IPOs, M&A, trading), fintech (credit card, software) and communication services (wireless, broadband, networking). What was a market defined by narrow leadership for most of 2024 has spread to numerous other big-cap stocks in these sectors that are U.S.-centric with strong fundamental and technical qualities.
Income investors should also feel encouraged as the Fed stays the course of gradually lowering short-term interest rates with the domestic economy growing GDP at an annual rate of around 3%. This is great news for balance sheets of U.S. corporations and even better news for the high-yield corporate bond market. The iShares Broad USD High Yield Corporate Bond ETF (USHY) is the largest by total assets ($15 billion), paying a 6.83% current yield with a weighted average maturity of 3.95 years. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw significant inflows in January as investors added $1.2 billion to the fund. There is something to be said for “just follow the money.” It tends to be a good strategy.
