AI Sector Faces 10.5% Nasdaq-100 Drop Amid Tariff Uncertainty

In the first quarter of this year, U.S. technology stocks faced significant challenges due to broader market uncertainty caused by tariffs. This uncertainty has had a particularly pronounced impact on the artificial intelligence (AI) sector, with concerns beginning with the DeepSeek controversy in January and culminating in the failed IPO of CoreWeave, an AI cloud computing startup backed by NVIDIA. This failure led to a significant drop in NVIDIA's market value.

The tech-heavy Nasdaq-100 index has declined by 10.5% this year, more than double the drop experienced by the S&P 500. Analyst Gil Luria from D.A. Davidson noted that the market is entering a phase of disillusionment, as described by Gartner's "hype cycle." This phase follows the "peak of inflated expectations" and suggests that while AI will continue to develop and have a significant impact, it will take longer than initially anticipated.

The rise in U.S. inflation rates, coupled with an uncertain labor market and the paralyzing effect of tariff uncertainty on businesses, has led to a reduction in spending. Luria explained that the previous environment of "unlimited investment" was fueled by a robust economy, allowing large companies to make substantial bets in the AI sector. However, as the economic outlook weakens, such aggressive investments may no longer be sustainable.

Luria further elaborated that the market has been in a state of "unlimited investment" due to a strong economic environment, enabling large companies to make significant investments in AI. However, with the economic outlook becoming less favorable, these investments may no longer be viable. The full impact of the tariff measures implemented on April 2 will take time to materialize, as the global economy adjusts to the new realities.

Analyst Dan Ives highlighted the potential for a Trump-induced economic recession, which could overshadow discussions about market bubbles. Ives noted that political moments of high uncertainty, such as Trump's tariff announcement, have historically brought significant volatility to the market. The market is now grappling with the implications of these tariffs and the potential for a broader economic downturn.