Nasdaq Momentum Amid Geopolitical Uncertainty: Is AI Still a Buy?

The Nasdaq’s AI-driven momentum in 2025 has defied a backdrop of escalating U.S.-China tech rivalry, yet the sector’s resilience masks a fragile undercurrent of overconfidence. For investors, the question is no longer whether AI will reshape global markets but whether the current valuation of AI stocks—particularly those of companies like Nvidia—reflects a realistic assessment of geopolitical risks or an overreliance on short-term optimism.

China’s Self-Reliance Gambit and Nvidia’s Strategic Balancing Act

China’s push for AI self-sufficiency has intensified, with state-backed initiatives aiming to triple domestic chip production by 2025 [1]. This effort, driven by U.S. export controls and fears of foreign backdoors in Nvidia’s H20 chips [6], has forced Nvidia into a precarious balancing act. While the company has developed lower-performance chips like the B30A to comply with U.S. regulations, it faces a shrinking window in China, where state-linked buyers are being urged to favor domestic alternatives [5]. The Trump administration’s 15% revenue-sharing rule on H20 sales further complicates Nvidia’s strategy, creating legal and competitive risks [4].

Yet, Nvidia’s Q2 2025 earnings—$30 billion in revenue, with a 122% year-over-year surge in data center sales [4]—suggest the company remains a linchpin of the AI ecosystem. However, its stock dipped 2% post-earnings, reflecting investor unease over China policy uncertainties [1]. This duality—strong fundamentals versus geopolitical fragility—highlights the sector’s inherent volatility.

Market Resilience or Overconfidence?

The Nasdaq Composite’s 5.5% gain in Q2 2025 [1] underscores the market’s appetite for AI-driven growth, but this optimism is not without caveats. Analysts note that 95% of corporations have yet to see measurable returns from generative AI investments [1], and speculative positions in high-beta AI stocks have reached historically crowded levels [3]. The sector’s performance has also been uneven: while Nvidia and DigitalOcean (up 26% in adjusted earnings [2]) have thrived, companies like C3.ai have plummeted 32% post-earnings [3].

The broader market’s rebound after the Trump administration paused aggressive tariff measures [5] suggests a degree of resilience, but this masks deeper structural risks. U.S. effective tariff rates now exceed 15% [5], threatening semiconductor supply chains critical to AI hardware. Meanwhile, China’s push for RISC-V-based alternatives [4] and Huawei’s Kirin 9000C [4] signal a long-term shift away from U.S. dominance.

Strategic Entry Points and Diversification

For investors, the key lies in balancing AI’s transformative potential with hedging against geopolitical overhangs. Nvidia’s next-generation Blackwell chips, if they gain regulatory approval, could offer a strategic entry point [2], but their success hinges on navigating U.S.-China tensions. Diversification into AI-driven defense and energy transition sectors—where structural demand is less exposed to trade wars—could mitigate risks [2].

Moreover, the energy transition and digital infrastructure (e.g., data centers) present complementary opportunities [3]. These sectors benefit from government subsidies and global decarbonization goals, offering a counterweight to the volatility of pure-play AI stocks.

Conclusion: A Calculated Bet

The AI sector’s momentum is undeniably powerful, but its current valuation reflects a narrow narrative of U.S. technological leadership. As China accelerates its self-reliance agenda and U.S. policies introduce new frictions, investors must distinguish between resilience and overconfidence. Strategic entry points exist for those who prioritize diversification, focus on ecosystem-building (e.g., infrastructure, defense), and remain vigilant to regulatory shifts. In this high-stakes environment, the Nasdaq’s AI-driven rally is not a buy signal in itself—it is a call to calibrate ambition with caution.

Source:
[1] China Aims to Triple AI Chip Output, Reducing Nvidia's Dependency [https://www.reuters.com/world/china/china-aims-triple-ai-chip-output-reducing-nvidias-dependency-ft-says-2025-08-27/]
[2] Strategic Sectors for Resilience: Navigating Stagflation ... [https://www.ainvest.com/news/strategic-sectors-resilience-navigating-stagflation-geopolitical-monetary-shifts-2508/]
[3] The Fractured Momentum: AI Stock Earnings ... [https://www.ainvest.com/news/fractured-momentum-ai-stock-earnings-underperformance-impact-investment-strategies-2508/]
[4] Nvidia Earnings: A Make-or-Break Inflection Point for AI-Driven Tech Stocks [https://www.ainvest.com/news/nvidia-earnings-break-inflection-point-ai-driven-tech-stocks-2508/]