Growing Geopolitical Tensions ‘Could Burst the AI Bubble’: Strategists

Analysis of Geopolitical Risks Affecting the AI Sector

Recent assessments highlight that escalating trade tensions between the United States and China, as well as increased hostilities between China and Taiwan, represent significant geopolitical risks that could disrupt the AI sector’s remarkable growth.

Despite a strong performance by tech stocks this year, concerns are mounting that this positive momentum may not be sustainable, especially with the looming US presidential election.

The analysis emphasizes two pivotal events that could impact the US stock market: a further estrangement in trade relations with China or intensified tensions across the Taiwan Strait. Even without descending into outright conflict, both scenarios are considered to pose substantial risks to the viability of the AI sector.

Strategists have long contended that the excitement surrounding artificial intelligence has inflated a market bubble. While they anticipate that the prevailing enthusiasm may lead to additional rallies, they caution that the sector’s current elevated valuations render it particularly susceptible to developments that might negatively affect investor sentiment.

A notable point of concern is Taiwan’s critical position within the AI supply chain. Taiwanese companies currently dominate the market for advanced chips and AI servers, supplying around 90% of the necessary components used by major tech players. Any disruption in this supply chain—stemming from geopolitical tensions—could have dire consequences for these companies.

There are fears that potential restrictions from China on the shipment of advanced semiconductor chips and AI servers from Taiwan could seriously compromise the AI supply chain in the US. Even the absence of open conflict could lead to significant disruptions, disproportionately impacting large tech corporations that rely on Taiwanese supplies, which may be costly or impractical to replace with alternatives.

Regarding US-China trade relations, the report warns of the potential for escalating disputes after the 2024 presidential election. If former President Trump were to regain office, a steep increase in tariffs on Chinese goods and a wider rollback of free trade practices are expected, which could impose cost burdens on technology companies.

Even under a hypothetical Harris administration, which would likely maintain current export control policies, there remains a significant risk. The impact of existing export controls has already affected major US tech firms, with a marked decline in the share of sales attributed to China and Hong Kong for companies like Nvidia. Further restrictions could adversely influence the share prices of US tech firms more profoundly and durably than in previous instances.

Despite the financial markets previously dismissing geopolitical tensions, such as the escalation in Cross-Strait relations or the Russia-Ukraine conflict, there is an indication that as the 2024 US election nears, investor anxiety concerning potential tariff increases and rising tensions may become more pronounced.