Why U.S. Tech Stocks Are Poised to Outperform Amid Tariff Volatility

The U.S. tech sector is emerging as a key beneficiary of geopolitical volatility, with recent shifts in trade policy toward China reducing risks and unlocking value for semiconductor and AI leaders like Nvidia (NVDA) and AMD (AMD). As the TACO trade (Trump Always Chickens Out) continues to play out, investors should take note: the tech-heavy S&P 500 is primed to outperform, driven by reduced tariff exposure, strategic policy pivots, and the enduring dominance of American innovation in AI.

Sector-Specific Tariff Exposure: Semiconductors Lead the Way

The semiconductor sector has been the focal point of U.S.-China trade tensions, but recent policy reversals are turning the tide. After months of export restrictions, the U.S. Commerce Department's decision to approve licenses for Nvidia's H20 and AMD's MI308 chips to China marks a critical inflection point. These chips, central to AI infrastructure, were once banned under rules targeting advanced computing hardware. Their resumption of sales—projected to begin in Q2 2025—could recover billions in lost revenue for both companies.

For Nvidia, the stakes are immense: the $4.5 billion inventory write-off in April 2025 and projected $15 billion in fiscal 2026 data-center revenue losses now look recoverable. Analysts estimate that resuming H20 sales could add $0.40–$0.50 to its earnings per share by year-end. AMD, too, stands to gain, with its MI308 chips addressing a critical gap in China's AI infrastructure. The sector's stock performance reflects this optimism:

Both companies surged over 5% pre-market following the Commerce Department's announcement, underscoring investor confidence in the sector's resilience.

Geopolitical Risk Mitigation: The TACO Trade in Action

The TACO trade—rooted in the observation that U.S. policymakers often retreat from extreme trade threats—is proving prescient. While the Trump administration's April 2025 ban on AI chips initially spooked markets, the swift reversal highlights a key truth: tech's global supply chains are too intertwined with U.S. firms' IP to sustain long-term restrictions.

Nvidia CEO Jensen Huang's direct lobbying, including meetings with President Trump and appearances in China, exemplify how companies can navigate geopolitical storms. The Commerce Department's shift aligns with broader trade talks, where China's agreement to increase rare-earth mineral exports to the U.S. softened the blow of AI chip restrictions.

The lesson for investors? While geopolitical risks persist, the tech sector's structural advantages—dominance in AI software (e.g., CUDA), cutting-edge chip design, and irreplaceable ecosystem lock-in—make it harder for policymakers to sustain punitive measures.

Tech's Dominance in the S&P 500: A Self-Reinforcing Cycle

The tech-heavy S&P 500 is in a virtuous cycle: its outsize weight in the index (nearly 30% of market capitalization) amplifies its influence on investor sentiment, while its resilience amid trade volatility reinforces its status as a safe haven.

Consider the Hang Seng Tech Index's 10% surge after the AI chip news—a sign that global markets now view U.S.-China trade tensions as manageable rather than existential. Even as Huawei and other Chinese firms chip away at U.S. market share (Nvidia's China GPU share fell from 95% to 50%), the sector's AI software leadership remains unassailable.

Investment Thesis: Overweight Semiconductors and AI Plays

The data is clear: semiconductor and AI-related equities are among the most tariff-resilient segments of the market. Key catalysts include:
1. Revenue recovery: Nvidia and AMD's $5.3 billion in combined lost revenue from export bans could be recouped as sales resume.
2. Margin stability: Reduced supply chain disruptions and lower inventory write-offs will bolster profit margins.
3. AI adoption tailwinds: China's AI spending (projected to hit $20 billion by 2026) will fuel demand for U.S. chips, even as local alternatives improve.

Investors should prioritize names with diversified revenue streams and exposure to AI infrastructure:
- Nvidia (NVDA): Leverages its CUDA ecosystem and strategic chip design (e.g., RTX Pro series).
- AMD (AMD): Benefits from its ROCm platform and lower exposure to military end-uses.
- Broadcom (AVGO): A defensive play with software and enterprise hardware exposure.

Avoid pure-play firms reliant on China for >50% of revenue unless they have hedging strategies (e.g., regional chip design).

Risks and Considerations

While the near-term outlook is bullish, long-term risks remain:
- Competitor catch-up: Huawei's semiconductor advances and China's AI model investments could erode margins.
- Regulatory whiplash: Future U.S. administrations might reimpose restrictions, though the TACO pattern suggests moderation.
- Market saturation: AI workloads may shift toward energy-efficient chips (e.g., AMD's MI300) or open-source alternatives.

Conclusion: Tech's Turnaround Is Here

The U.S. tech sector's ability to navigate trade volatility and geopolitical uncertainty positions it as a top-performing sector in 2025. With AI infrastructure demand surging and the TACO trade mitigating extreme risks, investors should overweight semiconductor and AI stocks. The sector's dominance in the S&P 500 ensures that even minor upside surprises—like further tariff rollbacks—will amplify returns.

For now, the message is clear: buy the dip in U.S. tech. The AI revolution isn't just about innovation—it's about who gets to profit from it.