Happy Monday! Stock futures turned red overnight following stunning AI developments out of China. Today’s edition unpacks the stock market’s blistering start under Trump 2.0, DeepSeek’s threat to the Magnificent 7 and more. First time reading? Join over 190,000 self-directed investors and sign up here.

Trump, Reagan and Chinese AI

Investors are piling into stocks like it’s 1985. 

Despite markets being closed Monday, the S&P 500 added 1.7% through the first week of President Donald Trump’s second term. The last time the benchmark index jumped by that much to start a presidential cycle was 1985, when Ronald Reagan sat in the Oval Office. 

Over the last week, the S&P 500 added $1.1 trillion(!) in market capitalization.

In that stretch Trump signed a flurry of executive orders and made a number of market-moving comments on interest rates, AI and crypto.

To be clear, President Trump entered office with animal spirits and optimism already in place. The S&P 500’s current bull run kicked off in October 2022, and it’s barely missed a beat on its way to a 71% return since then. 

Given Trump’s Reagan-esque preference for tax cuts and a deregulatory bent, there’s little indication momentum in asset prices will reverse course.

January this year — like 1985 — is so far proving fruitful for investors. 

“President Trump’s pro-growth agenda, a reprieve from rising rates, and solid earnings thus far have recently renewed investor optimism,” said Adam Turnquist, chief technical strategist for LPL Financial.

Presidential comparisons aside, however, the risk of the AI trade falling flat has suddenly become top of mind for investors.

On Friday, a little-known Chinese company called DeepSeek produced a free, cheap, and open-source ChatGPT-type tool that rattled some Magnificent Seven bulls. 

Early testing suggests it has outperformed competitors from Meta, OpenAI, and Anthropic.

The company claims it built the ultra-powerful model in eight weeks with a mere $6 million (think how tiny that is next to the $500 billion AI initiative Trump just launched with OpenAI). 

There’s a national security angle to this that Trump will likely comment on soon.

The more immediate concern for Wall Street, though, is whether this new foreign entrant to the AI race is legitimate enough to derail the American incumbents and their shareholders.

Here’s what the team at Yardeni Research told clients early this morning: 

“If it turns out that AI systems can be developed at a much lower cost than suggested by the enormous AI-related capital spending by American AI companies, and especially the Magnificent-7, then these stocks would be vulnerable to a selloff, which would depress the stock market given their weight in the S&P 500.”

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Elsewhere:

🏦 Big week of Fed news and earnings. More than 100 S&P 500 companies will report earnings this week, including those from Meta, Microsoft, Apple, and Tesla. Then on Wednesday, the Federal Reserve is expected to announce no change to interest rates.

📈 Stocks are reacting big to their own earnings. US companies that beat analysts’ profit estimates are seeing unusually large responses in their stock prices, which suggests shareholders are shrugging off uncertainty from the political and monetary policy front and remain focused on fundamentals. Netflix, for example, surged 10% on strong earnings last week. (Bloomberg)

🏅 The United States of sports gambling. Casual and newbie bettors have fallen in love with long-shot bets and parlays that involve multi-part wagers and massive payouts. In states where gambling regulators report the data, parlays accounted fro 27% of all money wagered last year through October. Naturally, gambling companies are crushing it. (WSJ)

Rapid-fire:

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Last thing:

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