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Both European and US stock markets finished higher on Tuesday, with the technology sector leading the rebound following a Chinese AI firm-led selloff. Risk sentiment recovered swiftly, as the previous day’s downturn may have been an overreaction, driven purely by the initial news.

Tech Stocks Lead Broad Gains

On Wall Street, the tech-heavy Nasdaq index rebounded 2% after a 3% decline in the previous session, while the S&P 500 rose 0.92% and the Dow Jones Industrial Average gained 0.31%.

In Europe, the Euro Stoxx 600 index climbed 0.5%, reaching an all-time high. However, the symbolic AI stock ASML failed to rebound, closing 0.77% lower. Germany’s DAX advanced 0.7%, while France’s CAC 40 edged down by 0.12%.

Notably, the rebound in US markets was not broad-based. Only three out of the 11 sectors in the S&P 500 finished higher, driven by the major US tech giants, while the remaining sectors all declined, reversing the trend seen on Monday.

Market movements suggest that concerns surrounding Chinese AI advancements primarily impacted hyperscalers’ stocks, amid fears of potential overspending on data centre expansion.

The Chinese AI model DeepSeek R1 is reportedly more cost-effective and performs better than America’s leading models, which triggered Monday’s global rout. Markets rebounded on Tuesday, largely driven by dip-buying in the Magnificent Seven stocks, despite ongoing concerns over a possible valuation hype.

Nvidia shares jumped 9% after erasing $600 billion (€575 billion) in market capitalisation the previous day. Other tech giants also saw strong gains ahead of key earnings reports from Microsoft, Meta Platforms, Tesla, and Apple later this week. Investors also shifted focus to the upcoming interest rate decisions from the Bank of Canada (BoC) and the Federal Reserve (Fed) later today.

Fundamentals remain key to shaping market trends. “Despite the declines yesterday, I remain an equity bull and would view this as a dip to be bought, amid continued strong economic growth and solid earnings growth to boot,” Michael Browns, a senior research strategist, wrote in a note.

Fed to hold, while BOC and ECB to lower rates

Central banks’ interest rate trajectory remains the key macroeconomic factor influencing financial markets, with the Fed being a particularly crucial bellwether.

The central bank is widely expected to pause its easing cycle after three consecutive rate cuts since September last year. Inflation has recently edged higher in the US, while the labour market has remained resilient. President Donald Trump’s return to the White House has also added uncertainty to the inflation outlook.

Markets are currently pricing in two rate cuts of 25 basis points each, expected in June and at the end of 2025. The Fed adopted a more hawkish stance at its December meeting, signalling a much slower pace of monetary easing.

President Trump called for lower interest rates last week at the World Economic Forum in Davos. Fed Chair Jerome Powell may face challenges during the Q&A session following the meeting, although political influence is unlikely to directly impact the central bank’s rate decisions.

The Bank of Canada is expected to continue its rate-cutting cycle with a 25-basis-point reduction, which would mark its sixth consecutive cut since June 2024. Meanwhile, the European Central Bank (ECB) is anticipated to follow suit by lowering its deposit rate from 3% to 2.75% on Friday.

Nonetheless, further rate cuts by central banks could support liquidity conditions and potentially drive corporate earnings growth in 2025.