Twenty Expressions from President Donald Trump That Potentially Disrupt the Unusual Surge in Artificial Intelligence (AI) Shares' Market Value
Since the end of 2022, Wall Street has been on a roll. Over the past two years and two months, the esteemed Dow Jones Industrial Average (DJI), the mighty S&P 500, and the growth-fueled Nasdaq Composite have soared by 33%, 59%, and an impressive 91% respectively, setting multiple record-breaking closing highs.
Investors are feeling optimistic for a variety of reasons, including the rise of artificial intelligence (AI) and the return of President Donald Trump to the White House. PwC analysts estimate that the AI market is a whopping $15.7 trillion addressable market, while President Trump oversaw staggering returns of 57%, 70%, and 142% in the DJI, S&P 500, and Nasdaq Composite during his first term.
However, a mere 20 words from President Trump could potentially derail this impressive rally in AI stocks and the broader market.
Statistics Don't Lie: Tariffs Aren't Friendly to the Stock Market
As Trump prepared to assume office, apprehension surged on Wall Street over his planned use of tariffs. A tariff is simply a tax levied on imported goods that aims to make domestically manufactured goods more competitive.
While the underlying idea behind applying tariffs is to shield American manufacturing jobs and inspire multinational corporations to manufacture goods domestically rather than abroad, implementations seldom translate seamlessly into reality.
When County X imposes tariffs on goods from Country Y, it's not unusual for Country Y to retaliate with tariffs of its own on Country X's exports. This tit-for-tat approach can have far-reaching consequences, damaging trade relations and trust with other nations.
In December 2022, Liberty Street Economics, a Fed-affiliated research group, revealed findings from their investigation into how tariffs affect domestic companies. Their research, titled "Do Import Tariffs Protect U.S. Firms?", found that companies tied directly to tariffs underperformed on the days they were implemented. Additionally, the study showed a continuous decline in profits, employment, sales, and labor productivity for these exposed companies between 2019 and 2021 1.
One compelling finding was that tariffs sometimes make it challenging for domestic manufacturers to keep pace with international competitors on price. While some tariffs target finished goods (output tariffs), others target raw materials (input tariffs), which can cause problems for U.S. companies.
As President Trump has implemented tariffs on countries like China, Mexico, and Canada, the AI boom could now be in his crosshairs.
One Sentence from President Trump Could Put the AI Rally on Pause
Before his inauguration, Donald Trump declared his intention to revoke President Joe Biden's AI executive order and promote an 'America First' mentality. Trump's AI agenda focuses on national security, domestic AI innovation, and deregulation, fostering an increase in mergers and acquisitions and making it simpler for breakthrough AI innovations to enter the mainstream market.
However, a recent comment from President Trump could derail the AI movement's momentum. While discussing funding for semiconductor companies from the CHIPS and Science Act, Trump stated that funding wasn't necessary and that companies would be less inclined to repay at high tax rates. He went further by suggesting a 25% tariff on automobiles, pharmaceuticals, and semiconductors would be imposed on April 2, with escalating tariffs to follow.
Besides causing a potential surge in prices for technology companies and consumers, tariffs on chipmakers may strain trade relationships between the U.S. and Asian countries. For example, Nvidia, the popular face of the AI revolution, isn't impacted by China's tariffs. However, their key working relationship with chip fabricator Taiwan Semiconductor Manufactory Limited (TSM), whose advanced chip packaging is essential for AI-powered data centers, could be affected by tariffs.
Strained relationships with China, being a major market for Nvidia with quarterly sales in billions, could potentially halt Nvidia's impressive rally.
History Shows No Mercy for AI Stocks
If investors turn their focus beyond the immediate short term, they'd likely see the long-term potential of AI. Empowering software and systems with the capacity to learn, act, and improve autonomously promises disruptive change across multiple sectors.
However, history is also unforgiving. Emerging technologies have consistently encountered a 'bubble bursting' event since the advent of the internet in the mid-1990s. Investors tend to overestimate how rapidly new innovations will be adopted and reach mainstream adoption, leading to inflated expectations.
In the case of AI, most businesses lack clarity on how to optimize AI or realize positive returns on their AI investments, leading some to speculate that we are in the midst of an early-stage market bubble. Although AI giants like Nvidia and major stock indices, which have been lifted by AI stocks like DJI, S&P 500, and Nasdaq Composite, face greater challenges than just tariffs.
All technologies require time to mature, and we are nowhere near this maturation phase with AI.
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- Despite the strong performance of the Dow Jones Industrial Average (DJI), S&P 500, and Nasdaq Composite due to factors like AI and political changes, investors should be cautious about overestimating the growth of AI and potential impacts of tariffs on key companies like Nvidia.
- If President Trump were to impose tariffs on automobiles, pharmaceuticals, and semiconductors, it could increase prices for tech companies and consumers, potentially affecting Nvidia's relationship with Taiwan Semiconductor Manufactory Limited (TSM) and impacting their sales in key markets like China.
- To make an informed investment decision, it's crucial to consider statistics showing that tariffs can negatively impact domestic companies' performance, profits, employment, sales, and labor productivity.
- Investors should acknowledge that historical trends indicate a 'bubble bursting' event for emerging technologies like AI, and being aware of potential challenges facing AI giants like Nvidia and major stock indices is key to achieving positive returns on AI investments.
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