Choppy Trade: A Tactical Play on the AI Chip Rally Amid Geopolitical Volatility

The market is caught in a classic seesaw. On one side, the powerful AI chip rally is firing up again. On the other, geopolitical jitters and a broader risk-off rotation are pressing down. This conflict creates a tactical opportunity: the rally has legs, but it's vulnerable to a sudden shift in sentiment.

The setup is clear in the premarket. Memory chipmakers are leading the charge, with Micron up 6.4% and Western Digital up 4.9% in premarket trading. This extends the strong AI-fueled momentum from 2025. Yet this chip strength is unfolding against a backdrop of a risk-off session. Just last week, the S&P 500 posted its first back-to-back losses of 2026, a sign that investors are pulling back from perceived risks.

The primary catalyst for that pullback is escalating geopolitical tension. Reports of increasing U.S.-Iran tensions prompted a safe-haven bid last week, lifting gold and silver while pressuring bank stocks. This dynamic is a direct threat to the AI rally's stability. When geopolitical fear spikes, capital flees from riskier assets like tech and flows into havens, creating a direct headwind for chipmakers.

The trade here is a battle between two forces. The AI demand story, backed by strong earnings and a clear growth trajectory, is driving the premarket gains. But the geopolitical risk, which can trigger sudden volatility and rotation, is the countervailing pressure. For a tactical investor, the key is to recognize that the AI rally is real and powerful, but its path is now choppy. The event-driven play is to position for the AI strength while staying alert to the geopolitical trigger that could reverse the move.

The Mechanics: Earnings, Tariffs, and Leadership

The current setup is being shaped by two immediate catalysts: a powerful earnings beat and a new policy directive. Together, they are creating a sector that is both buoyed and constrained, setting the stage for a choppy, event-driven trade.

First, the positive catalyst is clear. TSMC's record fourth-quarter results provided a major sector-wide boost. The company reported a 35% year-over-year profit increase, sending its U.S.-listed shares up 6.5% premarket. This wasn't just good news for one stock; it validated the AI chip demand thesis and lifted related names like ASML. This earnings strength is the fundamental engine driving the recent rally in memory chipmakers like Micron and Western Digital.

Second, the new policy creates a direct, immediate headwind. President Trump signed a proclamation imposing a 25% tariff on certain semiconductors. This is a tangible cost increase for importers and a reminder of the political friction that can disrupt the supply chain. However, the proclamation includes a key carve-out: the levy won't apply to chips used in U.S. supply chain buildouts. This distinction is critical. It signals that the administration is willing to support domestic semiconductor manufacturing while still applying pressure on imports, creating a bifurcated environment for the sector.

The market's reaction to these conflicting signals is visible in the leadership. The rally is concentrated in specific areas. The iShares Semiconductor ETF (SOXX) is up a near 12% year-to-date, handily beating the Nasdaq 100's 1.2% rise. This highlights where investor faith is strongest-on the AI-driven demand story. Yet, the broader tech sector remains under pressure from other factors, like bank earnings disappointments and geopolitical fears, which is why the rally is so selective.

The bottom line is a sector in two minds. On one side, stellar earnings from the industry's linchpin are providing undeniable momentum. On the other, a new tariff policy introduces friction and uncertainty. For a tactical investor, the play is to ride the earnings-driven momentum in the semiconductor ETF and its leaders, but to watch the tariff carve-out and any broader geopolitical shifts that could quickly reverse the sentiment.

The Setup: Valuation, Rotation, and What to Watch

The immediate risk/reward for the chip trade is now finely balanced. The sector has strong momentum from earnings, but it's facing a rotation out of heavyweight tech names into more undervalued areas. This shift in market leadership is a key signal to watch.

The rotation is clear. While the iShares Semiconductor ETF (SOXX) is up a near 12% year-to-date, money is flowing out of other tech giants. This week, the Nasdaq, S&P 500, and Dow Jones Industrial Average finished lower for a second straight session following the start of bank earnings season. That pressure is pushing capital toward areas like small caps, materials, and industrial stocks. This rotation suggests a potential shift in market leadership away from the mega-cap tech names that have driven the market for years. For the chip rally, this is a mixed signal: it validates the strength in AI-driven demand, but it also means the broader market's focus is moving elsewhere.

The next major test will be bank earnings. Reports from Morgan Stanley and Goldman Sachs are set to release before the bell, following a tough week for the sector. JPMorgan's stock has declined 5% over two days after its report, and its rivals fell sharply. These results will further test the resilience of the broader market. If bank earnings disappoint, it could deepen the risk-off sentiment and pressure the semiconductor rally. If they hold up, it could provide a broader floor for equities.

Finally, the market's sensitivity to geopolitical headlines remains acute. This week's action on oil prices is a perfect illustration. West Texas Intermediate crude futures sank nearly 4% to $59.70 a barrel after President Trump hinted he might hold off on attacking Iran. This drop shows how quickly sentiment can shift on a single geopolitical development. For chip stocks, which are already caught between earnings strength and tariff policy, any new spike in geopolitical tension could easily reverse the current momentum. The setup is one of tactical opportunity, but it demands constant vigilance for these external triggers.