20 Words From President Trump: AI Stocks' Potential Downfall

In the world of investing, it's often the smallest comments that can have the most significant impacts. For artificial intelligence (AI) stocks, which have been on a tear since the end of 2022, a mere 20 words from President Donald Trump could spell disaster. Trump's recent comments on tariffs have the potential to derail the jaw-dropping rally in AI stocks and the broader market.

Trump's timeline suggests that a 25% tariff on automobiles, pharmaceuticals, and semiconductors would go into effect on April 2, with the expectation that these tariffs would be raised "substantially higher over a course of a year." This could dramatically increase the cost of various goods and services for tech companies, including those in the AI sector.

Quantum computing stocks, which have been on a roll recently, popped on Tuesday as the Nasdaq composite also climbed. Shares of D-Wave Quantum (QBTS) popped more than 17% to 6.18, Rigetti Computing (RGTI) soared more than 36% to 13.40, IonQ (IONQ) stock advanced more than 14% to 44.65, and Quantum Computing (QUBT) advanced over 15% to 11.33. However, these gains could be short-lived if Trump's tariff policies come to fruition.

Statistically, tariffs are troublesome for the stock market. In the weeks leading up to Trump's inauguration, concerns mounted on Wall Street over the incoming president's proposed use of tariffs. A tariff is a tax on imported goods that's designed to make domestically manufactured goods more price competitive. However, if Country X places a tariff on a group of goods being imported from Country Y, it's not uncommon for Country Y to retaliate by implementing tariffs of its own on imports from Country X. These escalatory tactics can also expand beyond these two countries and hurt trade relations and/or trust with other nations.

In early December, Liberty Street Economics, which is comprised of economists who publish research and analysis on behalf of the Federal Reserve Bank of New York, unveiled a report that looked at how tariffs impact domestic companies. What researchers found in their study (Do Import Tariffs Protect U.S. Firms?) is that publicly traded companies with direct ties to tariffs performed poorly on the days they were implemented. Liberty Street Economics referenced tariffs Trump implemented on China in 2018 and 2019 and noted a clear share-based underperformance for companies with direct exposure to these tariffs. Further, the analysis showed that profits, employment, sales, and labor productivity, on average, declined for these exposed businesses from 2019 to 2021.

Perhaps the most telling finding is that tariffs sometimes make it tougher for domestic manufacturers to compete with overseas producers on price. Whereas some tariffs are focused on finished goods (known as output tariffs), others are geared at inputs, such as steel, which are used to manufacture finished goods domestically. Tariffs on inputs can create all sorts of issues for U.S. companies.

In conclusion, President Trump's proposed tariffs on semiconductors and other goods could significantly increase the cost structure of AI companies, reduce their competitiveness, and potentially slow down innovation in the sector. Investors should be aware of the potential risks and monitor the situation closely as Trump's administration takes shape.