Markets Rally on TSMC Strength, AI Demand & Eased Iran Tensions amid Fed Uncertainty

Thursday’s market action reflects a convergence of several key macro-economic signals and corporate performance that lifted investor sentiment, while also revealing some fundamental tensions under the surface.

First, geopolitical risk eased. President Trump softened his rhetoric on potential U.S. military retaliation toward Iran, backed by diplomatic pressure from Middle Eastern allies. This helped oil prices fall more than 4%, with U.S. crude briefly dipping below $59/barrel. The de-escalation eased risk premia in energy markets and lifted equities.,

Second, Taiwan Semiconductor Manufacturing Company (TSMC) unleashed a wave of optimism with its Q4 2025 earnings: revenue exceeded NT$1 trillion (~US$33.7 billion), profits rose ~35–36% year over year, margins expanded to ~62%, and the company is increasing capital spending sharply in response to sustained AI demand. These results supported gains across the chip sector, including suppliers and peers like ASML and KLA.,

Third, labor market indicators signaled resilience. Initial U.S. jobless claims fell to 198,000 for the week ended January 10, significantly beneath forecasts of ~215,000. Continuing claims also declined. Despite this, hiring remains slow, and there’s mounting evidence of sectoral divergence—“low-hire, low-fire” dynamics in many industries.

Fourth, in the banking sector, results were mixed but generally strong. Goldman Sachs, Morgan Stanley, and BlackRock posted double-digit profit increases largely driven by higher investment banking and capital markets activity. By contrast, JPMorgan beat revenue expectations but saw a profit decline due to Apple-Card related charges and softer deal flow.,

Fifth, perhaps most consequential longer-term is the burgeoning political pressure on the Federal Reserve’s independence. The Justice Department’s investigation into Powell’s statements about Fed headquarters renovations, paired with the upcoming turnover possibility (his term as Chair ends May 15 although he may remain on the Fed board), raises stakes for interest-rate policy. Fed watchers are speculating whether rate cuts expected in 2026 will be delayed.,

Strategic implications:

• Investors should favor sectors with tangible AI exposure and strong earnings visibility, especially chipmakers and related suppliers, over more speculative or overvalued software names. Early 2026’s underperformance of software firms like Intuit, Adobe, Salesforce, and ServiceNow supports that contrast. [Primary]
• Financial institutions appear set to benefit from a stable rate environment and resilient credit, but face regulatory and political risk—especially those tied to consumer banking or reliant on Fed policy forecasts. Bank stocks’ performance reflects this, as do investor concerns about Powell’s position. [Primary & related]
• Sustained labor market strength—even amid weak hiring—makes rapid rate cuts less likely. Yield curves and fixed income positioning should anticipate shock resistance. BlackRock’s warning about 10-year yields exceeding 5% causing market correction is a warning flag.
• Easing geopolitical tensions, particularly with Iran, reduce tail risk in energy supply but warrant monitoring because of upside volatility if diplomacy fails.

Open Questions:

• Will Powell remain Fed Chair beyond May—and if not, who would replace him, and how would that change the rate outlook?
• Can AI demand continue to scale without choking capacity constraints (e.g., for CoWoS, node technologies) or worsening supply chain bottlenecks? [Related at TSMC commentary]
• Is demand softening in software/saaS customers due to economic pressure, even as hardware firms benefit? The divergence so far suggests mixed consumer enterprise spending. [Primary]
• How will inflation and bond yields evolve in response to sticky costs, political interventions (tariffs, trade policy), and Fed decision-making? Yield levels above 5% appear to be a potential catalyst for corrections.