Trump's Tariff Talk Sparks Market Volatility: AI Chipmakers Surge, Inflation Fears Loom

The week in the market was marked by a rollercoaster ride, with President Trump's proposed tariff hikes sending shockwaves through the stock market. While the announcement of the Stargate AI Infrastructure project lifted shares of AI-related companies like Nvidia and Microsoft, inflation fears and tariff jitters dominated the headlines.



AI Chipmakers Ride the Wave

The Stargate AI Infrastructure project, a $500 billion joint venture between Oracle, OpenAI, SoftBank, and other tech giants, has sparked optimism about a rising tide of AI investments in the U.S. As key technology partners, Nvidia and Microsoft saw their shares surge, with Nvidia climbing close to 5% and Microsoft rising nearly 4%. Wedbush analysts anticipate more announcements in the coming weeks, suggesting that this project could represent the start of a wave of massive AI investments.



However, Nvidia faces challenges in ramping up production of next-generation AI chips in 2025, and custom AI chipmakers are emerging as competitors. Despite these hurdles, Nvidia's dominance in AI chip development and its criticism of new chip export restrictions indicate that it remains a strong player in the market.

Inflation Fears and Tariff Jitters

The Trump administration's proposed tariff hikes have raised concerns about their potential impact on consumer inflation expectations. While the direct impact of tariffs on inflation may be modest, history suggests that consumers could perceive a broader and more persistent effect. Goldman Sachs estimates that a universal 10% tariff could trigger a one-off boost to headline inflation by up to 1 percentage point in the worst scenario.



The greater concern for policymakers is the potential rise of inflation expectations. If consumers believe that prices will rise, they may adjust their spending behaviors and demand higher wages, creating a self-fulfilling cycle. This is particularly relevant given the recent high inflation rates and the fresh memory of inflation in the minds of consumers.

Market Reaction and Fed's Response

The stock market reacted negatively to the potential inflationary impact of tariffs, as higher inflation expectations could lead the Federal Reserve to raise interest rates, making borrowing more expensive for companies and consumers alike. The market may also react negatively to the uncertainty surrounding trade policies, as investors may prefer a more predictable economic environment.

However, if the Fed adopts an expansionary monetary policy to mitigate the output implications of tariffs, as suggested by the New Keynesian model, this could provide a boost to the stock market, particularly for sectors sensitive to interest rates and economic growth.

In conclusion, the Trump administration's proposed tariff hikes have sparked market volatility, with AI chipmakers surging on the back of the Stargate AI Infrastructure project. However, inflation fears and tariff jitters have dominated the headlines, potentially complicating the Federal Reserve's monetary policy decisions. The market's reaction will depend on various factors, including the extent of tariff increases, the Fed's response, and the overall economic outlook.