AI Global
After months of concerns that the so-called AI trade was overdone and recession risks were climbing to alarming levels, investors reacted with enthusiasm to recent news of AI infrastructure investments around the world and solid economic data. Since the S&P 500’s low point following “Liberation Day,” a renewed interest in growth themes helped the market index rebound by over 15%, while AI oriented stocks climbed 25%. Beyond AI, tariffs remain a threat as the administration struggles to complete negotiations with all the countries potentially subject to “reciprocal” levies. Nonetheless, we are seeing growth drivers amplified by the spread of AI adoption globally.
Last week, Amazon Web Services announced expansion of server farms to countries including Mexico, Chile, Taiwan, New Zealand, and Saudi Arabia. Nvidia reported its latest results, reassuring investors that it has ample demand despite more restrictions on sales to China. A raft of deals in the Middle East, announced earlier in April, would expand markets for Nvidia, AMD, and the many other companies with the chips and equipment needed to create the data center infrastructure for artificial intelligence capabilities. These deals were made possible by the Trump administration’s decision to rescind the so-called AI diffusion rule created at the end of the Biden administration, which had limited advanced chip exports to many countries. With those rules removed, the way was paved for tens of billions of dollars of AI investments between US companies and the UAE and Saudi Arabia.
AI becomes not only the new economy’s growth engine in the US, as we wrote several weeks ago, but is now going global. While investors recognized the capacity for AI to drive stock valuations across multiple sectors, this news suggests a much larger potential for sales and profit growth and for that growth to stretch further into the future. We are selecting stocks to capture the appreciation potential from sources such as AI, but also building in protection against the most significant market risks.
Fortunately, the U.S. economy remains strong. Inflation has moderated, unemployment remains low, and consumer spending continues to support broader growth. Tariffs remain a threat, but recent reductions in levies on goods coming from China and the 90-day pause on reciprocal tariffs allow for negotiations. The legality of the administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs broadly across countries has now also come into question. The extent and impact of tariffs have become more uncertain. This and the latest news on AI spending allowed the S&P 500 to recover fully from the “Liberation Day” selloff and then some.
As the political wranglings continue—on tariffs and on the federal budget—investors are taking comfort in an improved growth outlook. We must still position for these political risks, so we look for value and opportunity in companies with more domestic exposure (to steer clear of those tariff risks) and in companies facing less elastic demand (which would allow greater pass-through of tariff-induced price increases). The higher yields many of those companies offer also provide cash flow to help investors ride out stock price volatility. Investors can benefit from these new, larger growth opportunities and still build defense against the worst of the tariff fallout.
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