January 29, 2025

Artificial Intelligence Gets a Comeuppance

The catalyst that has driven this market higher for more than two years got punched in the face on Monday. Is it the end of the gravy train or just an overreaction?

Stocks came crashing down on Monday. The S&P 500 was down almost 2% and lost most of this year’s gains in one day. The tech-laden Nasdaq index fell more than 3%. It was all because of some upstart Chinese company.

A Chinese AI company is rattling faith in U.S. leadership and profitability in artificial intelligence (AI). China-based DeepSeek claims that its highly popular AI assistant performs equally as well as leading models at much cheaper prices and uses far less data. It calls into question the anticipated demand growth for AI.

The claims, if true, raise the possibility that upstart newcomers can challenge the leaders in AI. It also calls into question the enormous demand and forecast expenditures for the technology as well as the exorbitant stock prices of the current industry leaders.

The whole AI trade got hammered on Monday. And it wasn’t just chip stocks, which got crushed. Everything AI related took a beating. The red-hot electricity stocks are also getting hammered. The generation of AI requires enormous amounts of electrical power and demand is skyrocketing. In anticipation, certain utility stocks and natural gas stocks had been on fire. Stocks that had been basking in the magnificence fell hard Monday.

Stocks that had run up the most recently took the biggest hit. Broadcom (AVGO) fell more than 18% in one day. Constellation Energy (CEG) was down more than 20%. Both stocks had huge runs higher over the previous month. The selloff also bludgeoned midstream energy stocks Williams Companies (WMB) and ONEOK Inc. (OKE). Natural gas exporters Cheniere Energy (LNG) and data center REIT Digital Realty Trust (DLR) also got hit.

But the panic is probably an overreaction.

For one, you can’t necessarily believe the claims of some of these Chinese companies. Also, it’s one thing to copy an existing technology and another thing to create new technology. Even if the claims turn out to be mostly true, it certainly doesn’t kill the AI catalyst. It might just sober it up a little bit, which is probably overdue.

This is the problem with high-flying stocks. Any bad news gets dramatically amplified because euphoria is so easy to disappoint. The AI catalyst is still very real. But it may have gotten ahead of itself. A day like Monday was bound to happen.

Plus, many long-neglected defensive stocks are rallying. Healthcare and consumer staples stocks soared on Monday. Interest rate-sensitive stocks that had already turned around with the falling interest rates over the past couple of weeks are also getting a boost.

Stocks recovered on Tuesday. We’ll see if this was just a one-day overreaction or something more.

Recent Activity

January 8
ONEOK Inc. (OKE) - Rating change – “HOLD” to “BUY”
AbbVie Inc. (ABBV) – Buy half
NextEra Energy (NEE) – Rating change “HOLD” to “BUY”

January 15
Toll Brothers, Inc. (TOL) – Rating change “BUY” to “HOLD”

January 29
Broadcom Inc. (AVGO) – Rating change “HOLD” to “BUY”

High Yield Tier

AGNC Investment Corporation (AGNC – yield 14.9%) Earnings – The mortgage REIT reported solid earnings on Monday. Numbers were better for the full year but a little worse for the quarter as the environment took a slight step back. The stock was up after the report because the environment is clearly trending in the right direction for the stock. After wallowing since October, AGNC had a nice rebound over the past couple of weeks, up about 7%. Spreads are still higher as the Fed Funds rate has already been cut 1% and longer rates are higher. AGNC should be set up for a much better 2025. BUY

Brookfield Infrastructure Partners (BIP – yield 4.9%) – The infrastructure REIT has been showing some life of late, up around 10% in the past two weeks. Like most other utilities, BIP was riding high until the middle of October when the interest rate narrative changed for the worse. The business itself is solid with remarkably stable revenues and a growing dividend. BIP was a superstar performer before inflation and rising interest rates. It appears that interest rates have peaked and are more likely to trend lower in the year ahead. That puts the wind at the back of this reliable revenue-generating stud. Brookfield reports earnings later this week. (This security generates a K1 form at tax time.) BUY

Cheniere Energy Partners, L.P. (CQP – yield 5.9%) This natural gas export partnership took a big hit on Monday as the AI trade took a beating, down 4.4%. CQP had been riding high as it will benefit from the growing natural gas demand and the relaxing of export restrictions. But Monday’s market extracted a pound of flesh from companies benefiting from the surging electricity demand from AI. But the selling action was likely way overdone. I expect CQP to slowly recover over the next few weeks and resume the upward trend. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD – yield 6.4%) – This slower-moving midstream energy partnership showed its advantage on Monday. While many previously high-flying midstream stocks got crushed, EPD declined just 0.36%. Its up over 5% this month and 14% since the election. There will be more oil and gas production with the policies of the new administration as well as a much more friendly regulatory environment. It appears that EPD is headed right back to the 52-week high and beyond. The stock is still below the all-time high set in 2014 and can certainly move beyond that, especially with much higher earnings now. (This security generates a K1 form at tax time.) BUY

FS KKR Capital Corp. (FSK – yield 12.4%) – While AI-related stocks got a comeuppance, this Business Development Company (BDC) continued to forge ahead and made a new 52-week high this week. The stock even endured the last ex-dividend without a selloff, which is unusual for a stock with such a high yield. FSK is a strong beneficiary of the Trump victory. The perception of high economic growth going forward is exactly what FSK needed. It has a portfolio of smaller companies that tend to be economically sensitive. The prognosis got better going forward. BUY

Main Street Capital Corporation (MAIN – yield 6.8%) – As a BDC, this story is very similar to that of FSK. Main Street’s portfolio of companies not only makes high interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. MAIN is also breaking out and made a new high last Friday. MAIN was a rare stock that didn’t have a December swoon. The improving economic outlook leaves room for further appreciation. BUY

ONEOK Inc. (OKE – yield 3.9%) – This more volatile midstream energy company stock got spanked on Monday, down 3.9%. It was riding high on the growing natural gas demand for electricity. Like just about all the other AI beneficiaries, it took a hit. But the central story is still terrific. The market loves the new acquisitions of Medallion Midstream and Enlink Midstream (ENLC), as the new additions are accretive immediately. The story remains strong as recent actions will enhance earnings into a future that is getting better with the election and the surging natural gas demand. BUY

The Williams Companies, Inc. (WMB – yield 3.5%) – This midstream energy company took the biggest hit of any energy stock in the portfolio on Monday, down 8.43%. It had been making new highs and was up about 7% this month and 79% over the last year as it is highly focused on natural gas. The booming electricity demand and the anticipated advantages for natural gas played right into its hands. But Monday’s market came for it. But the environment is still very positive (and now it’s cheaper). There is still growing demand in the U.S. and overseas. Williams guided to the upper half of 2025 estimates and the future looks great. BUY

Dividend Growth Tier

AbbVie (ABBV – yield 3.8%) – The future looks good for this biotech company. AbbVie is turning the corner from the Humira expiration as new drugs Skyrizi and Rinvoq are expected to generate $16 billion this year, replacing nearly all the peak Humira revenue alone. The company returned to slow revenue growth in the second half of 2024 and is expected to generate “robust” growth this year. There are also several drugs that should receive FDA approval this year. Revenues are expected to be $63.5 billion in 2025, eclipsing prior peak revenue of $60 billion. The company is already growing beyond the peak Humira years and should be poised for high returns with the patent cliff behind it. ABBV is nearly 20% below the 52-week high with room to run. BUY

Ally Financial Inc. (ALLY – yield 3.1%) Earnings – The online bank reported better-than-expected earnings last week and Ally has moved more than 14% higher in the past two weeks. The bank reported lower loan loss provisions in the quarter after loan loss worries had held the stock back. ALLY was floundering badly along with most other financial stocks as the soaring interest rate narrative took hold. But it started to rally after big bank earnings were stellar and December inflation was OK, and the interest rate narrative improved. The good earnings report added fuel. Analysts are expecting earnings growth of 40% in 2025. BUY

Rating change – “HOLD” to “BUY”

Broadcom Inc. (AVGO – yield 1.1%) – Ouch! It was a one-day bludgeoning of nearly 20%. News about Chinese start-up AI company DeepSeek providing the same AI much cheaper roiled all AI-related stocks on Monday, especially those that had rallied the most, and AVGO was a prime offender. It was the worst single-day selloff in years for a stock that had remained within 3% of the high after a massive 42% two-day price surge last month. As mentioned above, I believe the selloff on Monday was overblown, even though the AI trade was due for a reckoning. Broadcom has a unique infrastructure niche that is not easily duplicated, and the stock was up for very good reasons, skyrocketing profits. This should be a rare opportunity to buy AVGO when it’s cheaper. BUY

Cheniere Energy, Inc. (LNG – yield 0.9%) – This natural gas exporter also took its lumps in Monday’s AI bloodbath. LNG declined by over 3% on the day. It might have been worse, but the stock was already down 10% from the high made earlier this month. The electricity and natural gas trade was red hot and bound to cool off. But things still look very good going forward. Natural gas demand is soaring in the U.S. and abroad. Cheniere stands to benefit from a friendlier regulatory environment, more natural gas production, cheaper domestic prices, and encouragement of natural gas exports. BUY

Constellation Energy Corporation (CEG – yield 0.4%) – Holy cow. The biggest recent beneficiary of the electricity trade took the worst hit of any stock in the portfolio on Monday, down more than 20%. CEG had been on fire after announcing the deal to acquire Calpine Corp. and the Trump administration’s announcement of a $500 billion private sector investment in AI and data centers. At Friday’s close, it was up 43% in January and 202% over the past year. If ever there was a stock itching to get knocked down a peg it was this one. But AI and data center investments aren’t going anywhere, and Constellation will continue to benefit. HOLD

Digital Realty Trust, Inc. (DLR – yield 2.7%) – This data center REIT was also on this week’s casualty list, down over 11% for the week by mid-day on Tuesday. It had benefitted mightily from the data center expansion prospects and was in the line of fire. The stock probably got a little too high too fast. But the future still looks extremely bright and DLR should recover going forward. HOLD

Eli Lilly and Company (LLY – yield 0.8%) – Finally. This pharmaceutical juggernaut liked Monday’s market. LLY was up almost 3% on the day as investors flocked out of AI stocks toward healthcare. The stock had been floundering near the lowest level in six months, but it has now moved up over 10% from the recent low hit just a few days ago. Lilly raised guidance for 2025 and still expects very strong earnings growth. I consider this still a great stock with rapidly growing earnings. But we will have to watch how this weight-loss drug demand thing plays out. BUY

McKesson Corporation (MCK – yield 0.5%) – McKesson recovered all the summer and fall dip in a very short time, resumed a funk in December, but is moving higher again this month. The pharmaceutical distributor took a plunge after second-quarter earnings missed because of supply disruptions. But the third-quarter earnings alleviated that concern, and the stock took off again. The healthcare sector was floundering somewhat because of uncertainty about the new regime in Washington but it has been strong with the tech selloff. McKesson reports earnings next week and hopefully it can ignite some upside traction. BUY

Qualcomm Inc. (QCOM – yield 2.0%) – This mobile device chip king barely even budged during this week’s tech selloff. That’s probably because it hadn’t been benefiting from the earlier rally. Although QCOM has been moving up this month, it’s still stuck in the mud of its recent range. It’s way below the June high and still the same price it was last spring. It’s worth being patient because when this stock moves it easily makes up for lost time. And it will take off at some point. The market wants to see strong U.S. smartphone sales from an AI upgrade cycle. Although that hasn’t happened yet, it could become a catalyst sometime this year. BUY

Toll Brothers, Inc. (TOL – yield 0.6%) – The luxury homebuilder company stock is up over 10% since January 10. After a tough couple of months, TOL is moving convincingly off the recent bottom. The recent better news about the likely direction of mortgage rates is the main catalyst. TOL was downgraded to HOLD earlier this month as the recent glum interest rate outlook combined with the inflation report presented a high level of short-term risk. But the outlook has improved, and mortgage rates have been falling. This month is a very welcome change for Toll so far. But the stock will still be rated a HOLD until the recent upside gets more established. HOLD

UnitedHealth Group Inc. (UNH – yield 1.6%) – UNH took another hit earlier this month when the market wasn’t thrilled with the earnings report and the FTC accused the company, along with others, of overcharging for life-saving drugs. Earnings were mixed as revenue missed and earnings beat. However, the company also reiterated 2025 guidance, and the stock has been moving higher again. It’s one thing after another with this one. I will maintain the rating for now because the price appears to be recovering. BUY

Safe Income Tier

NextEra Energy (NEE – yield 2.9%) – The regulation and clean energy utility stock moved higher last week after it reported earnings. NextEra delivered a strong quarter with earnings growth of 8.2% and reiterated its outlook through 2027. But the utility also announced plans to restart its Duane Arnold nuclear plant and a collaboration with GE Vernova (GEV) to develop natural gas-fired projects across the U.S. The utility is taking advantage of the soaring electricity demand, and the projects are likely to deliver more revenue and stronger growth going forward. BUY

USB Depository Shares (USB-PS – yield 5.5%) – Longer-term interest rates had been soaring and pressuring the price. But better news earlier this month reversed the trend. The 10-year fell from 4.8% to under 4.6% and fixed income rallied. This preferred stock has endured a tough bond market very well and should likely continue to hold its own. Plus, rates are more likely to trend lower from here in the year ahead. BUY

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.2%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates and hates rising ones. There will be more price pressure if rates continue to rise and vice versa. But the situation over the course of the year should be good. BUY

Copyright © 2025. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.