Weekly Comment

The Fed keeps rates at 4.25%-4.5% but revises growth and inflation projections.

March Monetary Policy Announcement 

 The Federal Reserve decided to keep its benchmark rate at 4.25%-4.5%, in line with expectations. However, its message was more cautious, as it lowered its growth forecast and raised its inflation estimate for 2025. 

Key Points: 

• Expectations for two rate cuts this year remain, with rates closing at 3.9%. 
• The pace of quantitative tightening is slowing, adjusting the reduction of bonds on the balance sheet. 
• The 2025 growth projection drops to 1.7% (from 2.1%). 
• Core inflation is estimated at 2.8%, above the previous 2.5% forecast. 
• Trade tensions are rising due to potential tariffs amid an economic slowdown. 

Markets will closely watch the Fed’s next moves and the evolution of trade tensions. 

Market Implications: 

 Markets will remain attentive to the Fed’s upcoming decisions and the development of trade tensions. 

Fed Indicator Update (March vs. December) 

Source: Federal Reserve

Buffett highlights Berkshire’s performance, liquidity strategy, and growth in Japan.

Warren Buffett’s highly anticipated annual letter is here, and as always, there’s plenty to analyze. In 2024, Berkshire Hathaway reported an operating profit of US$47 billion, a 27% increase despite more than half of its businesses experiencing a decline in earnings. 

• Liquidity Strategy: Berkshire ended the year with US$334 billion in cash. Despite speculation, Buffett reaffirmed that his focus remains on stock investments. 
  
• Beyond the U.S.: Berkshire continues to expand its presence in Japan, with investments in five major conglomerates. 
  
• Insurance Sector on the Rise: Operating profits in insurance grew 66% year-over-year, solidifying this business as the cornerstone of the firm. 

Buffett expressed optimism about the future of American businesses. While he didn’t directly address his retirement, he acknowledged that Greg Abel’s leadership transition is approaching. 

Top 10 holdings in Berkshire Hathaway’s investment portfolio 

*Figures as of December 31, 2024 – Cash position: US$334 billion.  

Source: CNBC 

Tariffs are on investors’ radar due to their impact on the economy and markets.

Now more than ever, tariffs are a key topic in the global economy. Not only do they affect inflation and corporate profitability, but they have also become tools for political negotiation.  

Since his campaign and now in his administration, Donald Trump has pushed for tariffs on imported goods from China, Canada, and Mexico, aiming to protect U.S. industry and reduce the trade deficit. However, these measures can have side effects such as trade tensions and rising consumer prices. 

🔹 What are tariffs? Tariffs are taxes imposed by governments on imported goods to make them more expensive and encourage the purchase of domestic products. They can also be used to generate revenue or as a political pressure strategy. 

🔹 How do they work? When a country imposes a tariff, the importing company pays the tax, either absorbing the cost or passing it on to the end consumer through higher prices. 

🔹 Impact on businesses: As production costs rise due to more expensive materials, companies often increase their product prices, affecting both businesses and consumers. 

In a nutshell, tariffs can benefit certain local industries but also make products more expensive and impact the global economy. Staying informed is key to making strategic financial decisions in response to these changes. 

Trade barriers: U.S. tariffs have risen significantly in recent years. 

Source: Capital Group

The performance during the season has been encouraging, with corporate profits exceeding expectations.

With more than 75% of S&P 500 companies having reported their results, earnings grew 11% year-over-year, surpassing expectations and marking the fastest pace in three years.

Key data:

• 76% of companies beat estimates, with an aggregate growth of 7%.

• Excluding tech megacaps, earnings grew 20%, the fastest pace since 2022.

• Megacaps (MSFT, AAPL, GOOGL, META, AMZN) 27% annual growth, with profit margins close to 25%. NVIDIA will report on February 26, with expected growth of 72%.

• The P/E multiple premium of megacaps fell to 30%, below its five-year average (50%).

• AI dominated earnings calls, with tech companies projecting a 49% increase in CAPEX for 2025.

The corporate sector remains resilient, with AI as a key driver. However, the 14% earnings growth forecast for 2025 may face challenges amid a restrictive monetary environment and new trade tariffs.

Tech Megacap Earnings Growth Minus S&P 500 Earnings Growth Excluding Tech Megacaps

Source: JP Morgan

Core inflation rose to 3.3% year-over-year, with the shelter index as the largest contributor. 

The Consumer Price Index (CPI) increased 0.5% month-over-month in January, exceeding the 0.3% forecast. On an annual basis, headline inflation reached 3.0%, also above the 2.9% estimate. 

Key factors driving the increase: 

• Shelter: +0.4% in January, accounting for nearly 30% of the monthly increase. The annual rise was 4.4%. 

• Energy: +1.1% month-over-month, with gasoline rising +1.8%. 

• Food: +0.4% month-over-month; egg prices surged 15.2% due to avian flu. 

Core inflation (excluding food and energy) increased 0.4% month-over-month and 3.3% year-over-year, exceeding estimates. Other notable increases were seen in auto insurance, recreation, and healthcare. 

What’s Next? 

Although inflation has cooled from its 2022 peaks, housing costs continue to exert pressure. Jerome Powell reiterated that the Fed is in no rush to cut rates, and markets now anticipate that the first-rate cut could be delayed until the second half of the year. 

Annual change (%) of the general and underlying consumer price index (CPI) (Core CPI) 

Source: US Bureau of Labor Statistics

DeepSeek is revolutionizing AI with a more efficient and accessible model, generating significant interest. 

The recent announcement of DeepSeek has captured the attention of the technology and financial industries, signaling a potential disruption in the artificial intelligence and semiconductor sectors. This efficiency has fueled its rapid adoption, accelerating downloads of its application. Below, we highlight some key points. 

Key Highlights: 

• Unprecedented efficiency: DeepSeek trains models with only $5 million and 2,000 GPUs, compared to the $100 million and 100,000 GPUs required by current industry leaders. 

• Market impact: Following the announcement, NVIDIA and other leading players in the industry saw significant stock losses, reflecting a potential shift in market dynamics. 

• Challenges ahead: From national security concerns to regulatory risks and cybersecurity threats, DeepSeek’s path is not without obstacles. 

While it is still early to assess its long-term impact, the evolution of DeepSeek raises key questions about the future of hardware and semiconductors in the AI industry.  

We remain attentive to exploring the implications of this breakthrough together. 

DeepSeek vs. ChatGPT comparison 

Source: Datacamp.com 

The Federal Reserve holds its benchmark rate steady, but the market anticipates adjustments in 2025. 

As expected, the Federal Reserve (Fed) maintained its benchmark interest rate within the 4.25%-4.5% range. This decision marks a pause following three consecutive cuts since September 2024, totaling a one-percentage-point reduction. 

The Fed’s statement highlighted that economic activity continues to grow at a solid pace, while unemployment remains low and the labor market strong. However, inflation remains somewhat elevated, and the Fed omitted previous references to progress toward its 2% target. 

Looking ahead, markets are pricing in a 3.9% rate by the end of 2025, with a 61% probability of at least two quarter-point cuts this year. The first cut could come as soon as the June 18 meeting. 

We will continue monitoring the Fed’s decisions and their impact on the markets. If you’d like more information on how this policy could affect your financial strategies, feel free to reach out to us. 

Expectations for the Fed Funds Rate

Source: JP Morgan 

China exceeds growth expectations in 2024 but faces significant challenges.

In 2024, China’s economy achieved a 5.0% growth rate, meeting the official target. However, this performance—its weakest since 1990, excluding the pandemic years—reflects an economy heavily reliant on fiscal and monetary stimulus. Key highlights include: 

• Inflation: Increased by only 0.2%, signaling weak domestic demand. 

• Industrial production: Grew 5.8%, led by high-tech sectors (+8.9%). 

• Real estate: Declined 10.6%, highlighting weakness in the sector. 

• Demographics: Population decreased 1.39 million, exacerbating the aging challenge. 

• International trade: Exports grew 7.1%, and imports 2.3%. 

• Unemployment: Urban unemployment rate remained stable at 5.1%. 

Despite these figures, China’s economy continues to face significant pressures, including weak domestic consumption, a persistent real estate crisis, and ongoing trade tensions with the U.S. Analysts anticipate that the government will announce new stimulus measures, although fiscal and monetary policy options are increasingly constrained. 

We will closely monitor the growth target China sets in the near future and assess the impact of its measures on the global economy. 

Annual and quarterly GDP evolution 

• oya: Refers to year-over-year variation. 
• Q/Q: Refers to quarter-over-quarter variation. 

Source: JP Morgan 

Core inflation shows signs of deceleration, while shelter costs register their lowest growth rate since 2022. 

The Consumer Price Index (CPI) rose by 0.4% in December, aligning with market expectations. Over the past 12 months, headline inflation increased by 2.9%. The Core CPI, which excludes food and energy, showed signs of deceleration with a 0.2% monthly rise, the lowest in four months. On an annual basis, it dropped to 3.2%.  

Key components include: 

1. Energy: Contributed 2.6% to the monthly increase, driven by a 4.4% rise in gasoline prices. 

2. Food: Prices rose by 0.3% in December, with annual variations of 1.8% for food at home and 3.6% for food away from home. 

3. Shelter: Increased by 0.3%, marking its smallest annual variation (4.6%) since January 2022. 

These figures provide some relief for the Fed, reflecting a slowdown in core prices, which could pave the way for further rate cuts in 2025. For now, the rate is expected to remain between 4.25% and 4.50% at the upcoming January meeting. 
 

Annual Variation (%) of the Consumer Price Index (CPI): General and Core CPI 

Source: US Bureau of Labor Statistics 

The rise of AI presents transformative opportunities and challenges that investors need to consider.

Artificial intelligence (AI) continues to be a central topic in the global tech landscape. Major companies such as Amazon, Alphabet, Meta, and Microsoft have announced investments of up to US$500 billion over the next three years, a move reminiscent of the internet boom of the 90’s. 

While short-term expectations tend to be optimistic, analysts agree that the true potential of AI will unfold over the long term. With applications ranging from semiconductors and cloud services to language models and end-user tools, AI’s impact could be described as “immeasurable.” 

However, this technological revolution is not without its challenges. Increasing demand for energy and materials like copper could create bottlenecks, while the risk of overcapacity and signs of false demand could impact return-on-investment projections. 

AI is expected to evolve in two phases: an initial phase driven by consumer adoption, and a longer phase focused on enterprise integration. This highlights the importance of distinguishing between current enthusiasm and sustainable long-term opportunities. 

Technological development tends to be overestimated in the short term, while its long-term potential is often underestimated. 

Source: Capital Group