Stocks were down for much of the day after another new threat to the AI-driven rally emerged but came off their lows into the closing bell on reassuring words from the Federal Reserve.
As expected, the central bank held steady its target range for the federal funds rate, and Fed Chair Jerome Powell emphasized the importance of incoming economic data in the calculation of future interest rate decisions. He also avoided direct commentary on the Trump administration.
The FOMC's January policy statement reflects only slight modifications. Economic activity "has continued to expand at a solid pace" and "labor market conditions remain solid." The Fed edited language indicating pressures in the labor market were easing.
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According to the Fed, "Inflation remains somewhat elevated," a revision from its prior statement that "inflation has made progress toward the Committee's 2% objective but remains somewhat elevated."
It was perhaps on this subtle shift that stocks sold off briefly Wednesday afternoon, though Powell said policymakers opted to "shorten" that sentence; the edit was "not meant to send a signal."
Follow the reaction to the first FOMC meeting of 2025 on Kiplinger's live Fed blog.
The yield on the 10-year U.S. Treasury note bounced on the release of the FOMC statement, reaching an intraday high of 4.589%, up from 4.549% on Tuesday, but did settle down with Powell's clarification of the Fed's intent and closed at 4.551%.
"The public should be confident that we will continue to do our work as we always have," the Fed chair said during his post-meeting press conference, "focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work."
Powell did address the big question about President Donald Trump and his new administration: "We don't know what will happen with tariffs, with immigration, with fiscal policy, with regulatory policy."
We now look forward to the release on Friday at 8:30 am Eastern Time of December data for the Fed's preferred measure of inflation, the Personal Consumption Expenditures Price Index.
At the close, the tech-heavy Nasdaq Composite had shed 0.5% to 19,632, the broader S&P 500 was down 0.5% at 6,039, and the blue chip Dow Jones Industrial Average gave back 0.3% to 44,713.
Does Alibaba have another AI rally killer?
Alibaba Group Holding (BABA) stock added 0.7% after the China-based conglomerate released an updated version of its AI model, Qwen, which it says outperforms well-known competitors in major benchmarks.
Alibaba asserts that its large language model has been pretrained on "massive data" and "achieves competitive performance against the top-tier models," including DeepSeek-V3, Microsoft (MSFT)-backed OpenAI's GPT-4o and Meta Platforms' (META) Llama 3.1.
Nvidia (NVDA) got knocked back again – the semiconductor stock was down 4% and was the worst performer among the 30 Dow Jones stocks on Wednesday. NVDA was up 8.8% on Tuesday following a history-making 17% decline on Monday.
"The concern for AI supply chains is whether the DeepSeek LLM approach causes a slowdown in hyperscaler AI capex," observes HSBC analyst Frank Lee, who notes that it's "too early to assess the full impact" but also says he "does not expect the AI capex trend to change dramatically."
Alibaba's announcement had disparate impacts across the semiconductor space. Broadcom (AVGO) was down 0.5% but Advanced Micro Devices (AMD) was up 2.8%.
And ASML (ASML) stock was up 4.3% after the Dutch semiconductor supplier beat top- and bottom-line expectations for its fourth quarter and issued a better-than-expected outlook for its first quarter.
CEO Christophe Fouquet didn't directly address DeepSeek and Alibaba developments but did say in a statement announcing ASML's results that AI growth "is the key driver for growth in our industry" but "has created a shift in the market dynamics that is not benefiting all of our customers equally."
Fouquet notes that this shift "creates both opportunities and risks as reflected in our 2025 revenue range."
Meta, Microsoft and Tesla report tonight
Magnificent 7 stocks Meta Platforms, Microsoft and Tesla (TSLA) highlight a particularly fraught post-closing-bell earnings calendar on Wednesday.
Investors will listen closely to what Meta and Microsoft have to say about their plans for data-center spending in light of DeepSeek's and Alibaba's respective revelations. "Tonight is a huge night for the tech world," writes Wedbush analyst Daniel Ives. "Making this night even bigger was the DeepSeek LLM AI model heard around the world over the last few days which will put even more of a spotlight focus on Zuckerberg and Nadella's capex comments."
META was up 0.3% but MSFT was off 1.1% ahead of their earnings announcements.
As for Elon Musk's EV maker, Ives says "Tesla could reach a $2 trillion market cap by the end of 2025 as the company's autonomous vision starts to take shape." The analyst – long a TSLA bull, with a price target of $550 that represents 41.4% upside from here – also cites expectations for "very solid" delivery demand in China this year and for "positive commentary" from Musk on Tesla's earnings call.
TSLA was down 2.3% on Wednesday.
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