AI Rally: Assessing the Priced-In Trade After Premarket Moves

The immediate spark for the pre-market rally is a landmark trade deal between the United States and Taiwan, announced late Thursday. This agreement directly targets the heart of the AI economy by reshoring critical chip manufacturing. The core terms are clear: Washington will slash tariffs on Taiwanese goods to 15%, down from a previous 20% rate. In return, Taiwanese chip and tech businesses have pledged new, direct investments totaling at least $250 billion in U.S. operations.

This isn't just a tariff cut; it's a strategic bet on supply chain security. The deal explicitly aims to "drive a massive reshoring of America's semiconductor sector". It targets the production of advanced chips that power everything from consumer electronics to the AI accelerators used by companies like Nvidia and AMD. The investment pledge includes $100 billion already committed by chipmaker TSMC in 2025, with more to follow, and is backed by credit guarantees of at least $250 billion to facilitate further expansion. This direct push to build capacity in the U.S. addresses long-standing vulnerabilities in the AI supply chain.

The market's reaction is already visible. The Nasdaq continued its positive momentum in pre-market trading, with futures for the index climbing. This aligns with the Nasdaq-100 Pre-Market Indicator, which serves as a leading gauge of sentiment for the tech-heavy index. The deal's mechanics-lowering a key cost of doing business while guaranteeing a massive influx of capital into U.S. semiconductor and AI operations-directly supports the valuation thesis for the entire AI trade. It signals that the momentum is regaining strength.

Immediate Price Action: Measuring the Premarket Move

The trade deal catalyst is translating directly into premarket moves for the key players. In early trading, futures for AMD rose 2.9%, showing a stronger reaction than the broader market. Nvidia futures gained around 0.9%, aligning with the Nasdaq-100 Pre-Market Indicator's 0.4% climb. This tech-led momentum is the clearest signal that the AI supply chain reshoring narrative is gaining immediate traction.

Intel presents a more nuanced picture. The stock had an earlier premarket pop of 3%, reflecting the same AI demand optimism. Yet this move must be viewed against a stock that has already run up significantly from its 2025 lows. Intel shares have soared more than 30% this year, driven by server chip shortages and a push for domestic manufacturing. The premarket action suggests the AI narrative remains potent, but the magnitude of the move also highlights how much of that optimism may already be priced in.

The bottom line is a clear bifurcation. The Nasdaq-100's premarket strength points to broad tech sector support, with AMD and Nvidia leading the charge. Intel's pop shows the AI demand story is still moving stocks, but its elevated valuation means any further gains will require new, concrete evidence of execution. For now, the premarket action confirms the trade deal is a live catalyst, but it also underscores the market's selective appetite for names with the clearest path to benefit.

Valuation Check: Is the Rally Sustainable?

The market's current optimism faces a fundamental test. The S&P 500's rally is now over three years old, stretching roughly three years and three months as of today. This longevity, coupled with the fact that most of 2025's biggest winners now trade at increasingly stretched valuations, sets a precarious stage. While Wall Street strategists expect the index to push higher, the sheer age of the bull market raises a red flag. History shows the average S&P 500 bull run lasts about 2.9 years, meaning the current one is already in uncharted territory.

This context makes the scrutiny of upcoming tech earnings reports critical. Analysts warn that results will be watched for any signs of accounting sleights of hand, a risk in a high-flying sector where expectations are already sky-high. For the AI trade to sustain its momentum, companies must not only meet but exceed these lofty forecasts. Any stumble in execution or a hint of pressure on margins could quickly deflate the euphoria.

Intel's recent premarket action exemplifies this tension. The stock's 3% pop reflects the same AI demand optimism fueling the broader rally. Yet this move must be viewed against a stock that has already soared more than 30% this year. That run-up, driven by server chip shortages and a push for domestic manufacturing, suggests much of the positive narrative may already be priced in. The risk is that without new, concrete evidence of execution-like a surprise beat on the next earnings call-the stock could face a correction after such a strong run.

The bottom line is that the AI trade is now a crowded, high-stakes bet. The trade deal provides a fresh catalyst, but it also raises the bar for performance. With valuations stretched and the bull market in its third year, the next earnings season isn't just a quarterly report card-it's a potential trigger for a re-rating. Investors should prepare for volatility, as the market's selective appetite for names with the clearest path to benefit will be put to the test.

Near-Term Catalysts and Watchpoints

The rally has a clear catalyst, but its sustainability hinges on a few immediate watchpoints. The most critical is the quality of upcoming earnings reports. As Swissquote's Ipek Ozkardeskaya noted, upcoming tech results will be watched for any signs of accounting sleights of hand. With the AI trade regaining momentum and valuations stretched, companies must not only meet but exceed the high expectations set by the trade deal and recent price action. Any stumble in execution or a hint of margin pressure could quickly deflate the euphoria.

A second key variable is monetary policy. The market's recent exuberance is being tempered by a fading expectation for further Federal Reserve rate cuts. Data from Thursday showed lower-than-expected U.S. jobless claims paired with strong manufacturing surveys, supporting the view that a rate cut is unlikely in the immediate term. This shift is significant for growth stocks, which typically benefit from low interest rates. As the Fed's policy path becomes clearer, it will directly impact the discount rate applied to future tech earnings, potentially capping the rally's upside.

Finally, watch for geopolitical friction. The U.S.-Taiwan deal is a win for the AI supply chain narrative, but it could irritate China. The agreement could also irritate China, which views Taiwan as its own territory. This introduces a new variable into the trade equation. Any escalation in tensions or retaliatory measures from Beijing could disrupt the very supply chains the deal aims to secure, creating a fundamental risk to the trade's long-term viability.

The setup is now tactical. The trade deal provides a near-term catalyst, but the rally's next leg depends on earnings delivering flawless execution, a dovish Fed remaining on hold, and geopolitical stability holding. Any stumble on these fronts could trigger a sharp reversal.