Market Uncertainties Surround AI Stocks Amid Tariff Concerns
Investors turned their attention to artificial intelligence (AI) stocks over the past two years, recognizing the potential of this technology to revolutionize industries similarly to electricity and the internet. Significant players like AI chip leader Nvidia (NASDAQ: NVDA) and software innovator Palantir Technologies saw their stock prices surge—171% and 340%, respectively, last year.
However, a shift from enthusiasm to caution has emerged recently. Early last month, President Donald Trump unveiled a plan for tariffs on imports, causing tech stocks, particularly in the AI sector, to decline.
Despite a 90-day negotiation period where tariffs on electronics were paused, uncertainty remains a concern for U.S. businesses. Higher prices from tariffs could ultimately affect U.S. consumers and companies that depend on imported parts and products.
Current Tariff Landscape
Presently, tech firms are not facing tariffs due to exemptions granted by Trump. Consequently, U.S. tech companies are not subjected to the 145% tariff imposed on Chinese electronics. However, exemptions for electronics from the pause don’t extend to China.
The Trump administration continues to evaluate appropriate tariff levels for electronics, poised to announce specific tariffs on imported parts and finished products soon. Companies are adapting their manufacturing processes to mitigate potential tariff impacts.
For instance, Nvidia is investing in building AI infrastructure in the U.S., while Apple is relocating its iPhone and product production away from China to India and Vietnam in response to tariff pressures.
While these strategic moves may lead to higher costs in the short term, they are likely to insulate companies from significant tariff impacts over time. Trump’s decision to pause general tariffs indicates some degree of flexibility that might benefit U.S. companies in the future.
If trade deals are reached and tariffs are lower than anticipated, U.S. stocks could increase significantly. Yet, potential high tariffs pose a risk that might hinder earnings and economic growth, delaying market recovery.
Valuations of Leading Tech Stocks
Considering the unpredictable tariff situation, is it wise to invest in undervalued AI stocks now? A look at the so-called “Magnificent Seven” tech stocks shows that four are trading below 30 times forward earnings estimates. Notably, Alphabet appears especially attractive at just 17 times forward earnings.
NVDA PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.
The outcome now hinges on tariff announcements. If the news is favorable, AI stocks might rally, lifting their valuations. Conversely, if tariffs are perceived as steep, further declines could occur. While optimistic indicators suggest improvement may be on the horizon, risks remain for short-term investors.
Yet, it’s worth noting that long-term investment strategies tend to provide a clearer picture of overall growth potential. Well-established AI companies like Nvidia and Alphabet are likely to thrive over the years thanks to their strategic investments, even if fluctuations occur in the shorter term.
While timing the market perfectly is nearly impossible, many AI stocks currently appear undervalued considering their long-term prospects. Investing at these levels could yield substantial returns over time, even if temporary dips happen in the coming weeks or months.
Seize Investment Opportunities in AI Stocks
Given the potential of successful stocks, this might be a prime opportunity for investors looking to capitalize on emerging trends.
Our analyst team has spotlighted companies they believe are primed for growth. If previous investments, like those in Nvidia, Apple, or Netflix, have seen remarkable gains, now may present a similar chance for savvy investors.
Suzanne Frey, an executive at Alphabet, and Randi Zuckerberg, former director at Facebook, are on The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, is also associated with this board. Additionally, Adria Cimino holds positions in Amazon and Tesla. The Motley Fool recommends several companies including Alphabet and Nvidia.
The views expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
