U.S. stock futures dropped sharply on Monday after the rise in the popularity of DeepSeek, a Chinese artificial intelligence model that demonstrates high performance at a significantly lower cost. This development sent shockwaves through the market, challenging the belief that massive GPU investments are necessary for powerful AI, particularly threatening big tech companies.

All major index futures were down, with the Nasdaq 100 falling more than 4.3%. This drop comes after the indices had posted gains for two consecutive weeks.

Apart from this, five of the total ‘Magnificent Seven' will report their earnings this week.

The 10-year Treasury yield stood at 4.50%, while the two-year yield was at 4.17%. According to the CME Group's FedWatch tool, there is a 99.5% chance that the Federal Reserve will keep interest rates unchanged later this week.

The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ) both experienced negative premarket trading on Thursday. SPY fell 2.36% to $593.6, and QQQ plunged 4.10% to $507.92, according to Benzinga Pro data.

Cues From The Last Session

Twilio Inc (NYSE:TWLO) shares surged over 20% following strong Q4 guidance and a revenue increase, prompting analysts to raise price targets.

Economic data showed the S&P Global Services PMI dropped to 52.8 in January, while the Manufacturing PMI rose to 50.1. Most S&P 500 sectors closed higher, with gains in communication services, utilities, and consumer staples. However, tech and energy stocks declined.

The Dow fell 140 points or 0.32% to 44,424.25, the S&P 500 lost 0.29% to 6,101.24, and the Nasdaq Composite dropped 0.50% to 19,954.30. Russell 2000 Index slipped 0.30% to 2,307.74.

Insights From Analysts

Assessing the DeepSeek impact, the global macroeconomic expert and market strategist, Anish Nanda said that the speed, cost, and focus of China's progress on chips is causing a rotation out of growth into value stocks.

However, he added that it remains to be seen if DeepSeek will prove to be a viable, cheaper alternative in the long term and if they can consistently innovate and take a leadership position in the sector that can be sustained. "Also little is known about the lab and its founder, Liang WenFeng," he told Benzinga.

"Nevertheless, it still poses a risk if U.S. tech giants' pricing power is finally being threatened and if their massive AI spending needs a rethink. Only time will tell who will emerge the winner in the long run. A tough battle seems to be on the cards.”

Ed Yardeni and Eric Wallerstein of Yardeni Research pointed out that this week will see a slew of big tech companies report their earnings.

"The next round of fun begins this week and next week when the Magnificent-7 report Q4 results," the note said.

Whereas Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) will report on Tuesday, Feb. 4, Nvidia Corporation (NASDAQ:NVDA), on the other hand, won’t report until Feb. 26.

"The question is whether they will disappoint because their capital spending on AI is soaring faster than their revenues. That could squeeze their collective profit margin. The forward profit margin of the Mag-7 has soared from 18.0% at the start of 2023 to 25.5% during the Jan. 25 week," the note added.

As per the CME's FedWatch tool, the probability of having no change in the rates was at 65.6% for March and 44.4% for May.

Talking about this and Bank of Japan's hike last week, the CEO of Mind Money Julia Khandoshko said, "In the current environment of global monetary uncertainty, with no clear timeline for when the Federal Reserve might further continue its easing rates, the BoJ's decision looks like a calculated response to economic challenges."

See Also: How to Trade Futures

Upcoming Economic Data

Here’s what investors will keep an eye on for the week:

Stocks In Focus:

Commodities, Gold And Global Equity Markets:

Crude oil futures were trading lower in the early New York session by 0.20% to hover around $74.51 per barrel.

The gold spot index was down by 0.08% to $2,768.92 per ounce. The Dollar Index was down 0.24% at 107.181 level.

Asian markets closed mixed on Monday as Hong Kong's Hang Seng, Australia's ASX 200, and South Korea's Kospi index rose. Whereas, India's S&P BSE Sensex, China's CSI 300, and Japan's Nikkei 225 index fell. European markets were lower in trade.

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