The stock market is a bit nuts at the moment but the semiconductor space is particularly volatile. Semiconductors are largely manufactured overseas, they require large capital investments with long repay timelines, and have tremendous geopolitical exposure under the Trump administration.
The two headlines that struck me this week (it's only Wednesday!):
- TSMC Pledges to Invest $100B on Chip Manufacturing in the US over 4 Years
- Trump wants to kill $52.7 billion semiconductor chips subsidy law.
The "AI trade" has largely been betting big on companies in-and-around the "AI sector" such as Nvidia (NVDA), Broadcom (AVGO), Meta (META), or Super Micro (SMCI). Valuations of those companies spiked in late 2024 amid tremendous optimism that earnings and growth were looking positive, and that a "lower regulation" environment under the incoming US administration would further accelerate "AI growth."
At its most fundamental level I believe the "AI trade" is a proxy for market optimism in a transformative capital and labor market shift that will no longer happen.
Against the backdrop of an extremely uncertain economic outlook I simply don't believe the "AI trade" is going to be the rocket ship it was in 2024.
The contradictory signaling by the Trump administration of encouraging TSMC while also trying to gut the CHIPS Act makes it unlikely that the long-term investments required to make the US competitive will happen in the foreseeable future.
Stack on top of that chips export restrictions and tariffs which may close the door to the biggest growth market for the semiconductor industry: China.
Adding insult to injury, investors reacted negatively to pessimistic earnings forecasts I alluded to yesterday. Those investors also reacted negatively to changes in gross-margin for a lot of firms which invested heavily in "AI."
You cannot have your cake and eat it too.
The impact of AI technologies may be transformative in 2025 and beyond. The investments made in 2024 are starting to see returns for businesses, especially those which have found ways to build new product offerings growing their customer base or to to improve productivity of their labor force.
Moving forward I don't believe that an AI trade on the hardware side of the fence is going to see the massive growth ever again. However an "AI trade" investing on the software side will produce substantial gains this year.