The big headlines in the US stock market thus far this year 2025 have mainly been the emergence of China’s DeepSeek artificial intelligence (AI) model and US President Donald Trump’s tariffs on US allies.
Both issues have obviously created large levels of uncertainty for the American stock market but Lombard Odier’s equity strategist Edmund Ng and senior equity research analyst Marco Barresi remain optimistic about the market’s outlook in the year ahead.
Import tariffs indeed pose a challenge to high US stock valuations in the near term, as shown on Feb 2 when Trump’s tariffs were enforced and the Nasdaq futures and S&P 500 futures were down 2.35% and 1.8% respectively in the early Asian hours.
However, the Trump administration, with their pro-growth policies of cutting corporate tax and recovery in the American manufacturing sector suggests earnings growth for the market this year.
“We expect US earnings to grow by 12%, acting as a key market performance driver, and see around 10% upside in the S&P 500 from its current level over the next 12 months,” write Ng and Barresi in their report.
DeepSeek and US tech outlook
The immediate market reaction to DeepSeek was a US$1 trillion hit in market capitalisation but the Lombard Odier analysts believe that the broader trend of capital expenditure on AI by large US companies — projected to grow by 20% to some US$290 billion ($391.8 billion) this year — will not be affected.
See also: DoorDash, Williams-Sonoma, TKO and Expand Energy to join S&P 500
While the DeepSeek AI model is a big step forward, the model appears to just be 'creative, fine-tuning of existing technology’ and relies mostly on the large language models developed at great costs by US tech firms. “We therefore view DeepSeek as an evolutionary rather than a revolutionary step”, the analysts state.
Semiconductor manufacturers and AI hardware component firms face uncertainty as despite potential increased demand for chips due to lower costs, doubts hover over the need for sustained infrastructure spending.
On the other hand, lower costs of developing AI models helps software companies and consumer electronics manufacturers in driving AI adoption. This offers a mixed bag for the outlook of the technology sector in the US, which prompts Ng and Barresi to hold a “neutral view” on the sector.
See also: Boeing CEO earned US$18 mil after mid-2024 start
Equity market outlook
Equity market returns are expected to have limited growth in the short term with the uncertainties of DeepSeek and tariffs. However, the US is seen to continue to deliver strong corporate earnings as the supportive environment brought about by the Trump administration has aided the recovery of non-AI cyclical sectors such as the manufacturing sector.
In Taiwan, Ng and Barresi feel that the stock sell-off, especially for the world’s biggest chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC) looks “overdone”.
"Non-AI chips still account for the majority of their revenue and its dominant market position continues to strengthen”, state the pair.
The DeepSeek threat has not gone unnoticed, with Trump calling it a strategic wake up call. While large planned capital expenditure by US firms still maintain substantial barriers to entry, the Chinese tech sector is reviving and tariffs might just be a temporary solution to keeping at bay the inevitable increased competition between the two largest economies. “Given China’s ability to innovate and compete, the outlook for Chinese equities could be improving,” say Ng and Barresi.
