Good morning investors,
The U.S.-Taiwan semiconductor deal commits $250 billion in American AI investment backed by government guarantees while capping tariffs at 15%, removing the policy overhang that's weighed on chip stocks for months. Small caps continue their historic run with Russell 2000 up around 8% YTD versus less than 2% for the S&P and Nasdaq, validating the rotation thesis as broader economic growth emerges.
TSMC CEO C.C. Wei declares "AI is real" after seeing customer evidence, forecasting strong growth through 2029 and dismissing bubble concerns. Goldman Sachs and Morgan Stanley close 2025 on high notes with dealmaking revenue surging, with Solomon calling 2026 setup "incredibly constructive" for M&A and capital markets.
Opening Bell: Chips Lead Again
S&P ($SPY ( ▲ 0.5% )) futures up 0.3%, Dow ($DIA ( ▲ 0.23% )) futures add 46 points, and Nasdaq ($QQQ ( ▲ 0.75% )) futures gain 0.6% as semiconductor momentum continues. The VanEck Semiconductor ETF ($SMH ( ▲ 1.24% )) already up 6.2% YTD after Thursday's 2.1% gain on the Taiwan deal news.
Major averages heading for small weekly losses - S&P down 0.3%, Nasdaq off 0.6%, Dow down 0.1%, but small ($IWM ( ▲ 0.36% )) and mid cap ($IJH ( ▲ 0.42% )) outperformance tells the real story of broadening market participation.
Taiwan Deal Changes Everything
The $250 billion commitment from Taiwanese tech companies for U.S. semiconductor and AI capacity, backed by $250 billion in government credit guarantees, transforms the investment landscape. The 15% reciprocal tariff cap provides certainty that markets craved.
Chipmakers building in America get tariff caps and defined exemptions while those that don't face steeper penalties. During construction, companies can import without new duties, minimizing supply disruption risks. This clarity makes AI earnings trajectories predictable for the first time.
As I noted yesterday, TSMC's Arizona gigafab cluster expansion perfectly positioned them for this outcome. The political risk that's haunted semiconductors for over a year just evaporated.
Small Caps Historic Outperformance
Russell 2000's 8% YTD gain versus sub 2% for large caps represents regime change accelerating. Thursday's jobless claims drop and Fed regional surveys showing manufacturing uptick validate broader economic growth supporting smaller companies.
It's been broader based economic growth so far. This isn't just rotation, it's recognition that economic expansion extends beyond mega cap tech. My highest conviction call for 2026 playing out faster than expected.
TSMC's AI Validation
TSMC's Wei's declaration that customers showed "evidence that AI really helps their business" and that "AI is starting to grow into our daily life" dismisses bubble fears definitively. The company seeing actual order books and customer roadmaps knows more than speculating analysts.
The growth forecast through 2029 and increased internal investment shows multi-year visibility rare in semiconductors. When the world's largest contract chipmaker commits capital at this scale, they're seeing demand others can only guess at.
Bank Earnings Divergence
Goldman up 4% and Morgan Stanley surging 6% after strong Q4 results contrasts with earlier disappointments from JPMorgan and Bank of America. The difference? Investment banking and trading strength at the Wall Street firms versus mixed results at universal banks.
Solomon's "incredibly constructive" 2026 outlook for M&A and capital markets suggests fee income acceleration ahead. The dealmaking pipeline building as companies position for growth validates optimism.
Crypto Bill Drama
Coinbase CEO Brian Armstrong torpedoing the crypto bill at the last minute by tweeting opposition shows industry divisions remain deep. The sticking point over stablecoin interest rewards versus bank deposits could move $1.2 trillion according to Fed analysis.
Senator Lummis saying "I feel like I got run over by a Mack truck" captures the frustration. February or March restart timing means regulatory clarity remains months away despite industry urgency.
Netflix Escalates WBD Fight
Netflix pivoting to all cash offer matches Paramount's structure, removing the complexity argument. The judge dismissing Paramount's expedited discovery request prevents immediate information advantage but the tender offer extension keeps pressure on.
This three way battle for entertainment assets shows content value recognition even as streaming economics remain challenged. Someone will overpay - the question is who.
Inflation's Messy Reality
December CPI closing 2025 looks clean at 2.7% headline but the details reveal complications. Housing inflation artificially depressed by October shutdown data gaps while services inflation runs hot at 4-5% for restaurants, healthcare, and transportation.
Core goods prices up 1.4% after falling last year shows tariff impact despite rollbacks. The 2 percentage point swing from deflation to inflation in furniture, vehicles, and recreational goods can't be ignored.
PCE expected at 2.8-2.9% for 2025 versus 2.7-2.8% in 2024 suggests inflation reaccelerating despite headline stability. The Fed's challenge: housing data unreliable, services too hot, goods normalizing slowly.
Hyperscaler Power Play
Reports of Trump pushing PJM grid operator for emergency reliability auction with 15-year contracts benefits Amazon, Microsoft, and Google enormously. The AI power constraint getting government intervention validates infrastructure criticality.
Watch these names as securing long-term power at regulated rates provides competitive advantages smaller players can't match.
Final Thought
The Taiwan semiconductor deal represents the kind of policy clarity markets desperately needed. Removing tariff uncertainty while guaranteeing $250 billion in investment transforms the AI trade from speculation to execution. Chip stocks responding immediately shows how much political risk weighted on valuations.
Small caps dramatically outperforming validates the broadening growth thesis. The Russell 2000 up 8% while large caps struggle proves economic expansion beyond tech mega caps. This rotation has years to run as mean reversion from decade-long underperformance continues.
Bank earnings divergence creates opportunity, Goldman and Morgan Stanley strength shows investment banking recovering while universal banks face mixed trends. Position for fee income growth as M&A pipelines build.
The inflation picture remains complicated despite headline comfort. Services running 4-5% inconsistent with 2% targets while housing data distortions mask true trends. The Fed faces impossible navigation with unreliable data and conflicting signals.
The market's resilience amid geopolitical chaos, Fed independence threats, and inflation uncertainty demonstrates underlying strength. Those waiting for perfect clarity miss opportunities developing now.
Have a great weekend and thank you for your continued readership.
As always, feel free to reach out with questions about positioning.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.