Market Risks: AI-Trade Slippage and Tariffs

Market Risks

The combination of a tariff war and concerns about the slowing growth of AI-driven trade could have significant, compounded effects on the stock market. Here’s a breakdown of how these factors could impact investor sentiment and stock market performance:

1. Heightened Market Volatility

• Uncertainty and Investor Risk Aversion: Both a tariff war and concerns about slowing AI growth introduce significant uncertainty into the market. Investors tend to react negatively to uncertainty, leading to increased volatility in stock prices. A sharp escalation in tariffs could harm the global trade environment, while concerns about AI could hurt investor confidence in a key growth sector. Together, these issues might lead to larger market swings as investors try to reassess the outlook for corporate earnings and economic growth.
• Sell-Offs: In times of heightened uncertainty, many investors may seek to reduce risk in their portfolios. This could lead to broad market sell-offs, particularly in sectors seen as vulnerable to the impacts of tariffs (e.g., manufacturing, agriculture, or consumer goods). In contrast, sectors that had been riding the AI boom, such as technology, semiconductors, and cloud computing, could also see pullbacks if growth expectations for AI-driven industries cool off.

2. Pressure on Growth Stocks

• Tech Sector’s Slowdown: AI had been a major driver of stock market growth, especially in tech stocks, which were buoyed by optimism about the potential of AI to revolutionize various industries. If the pace of AI adoption or growth slows (as suggested by the news of Deep Seek’s AI challenge), tech stocks may take a hit. Investors may revise their growth projections downward, reducing the premium placed on AI-focused companies. This could affect key players in the sector like Google (Alphabet), Microsoft, Nvidia, and smaller AI startups.
• Valuation Contraction: Growth stocks, particularly in the tech sector, are often valued based on future earnings potential. If AI’s contribution to economic growth and corporate profits is seen as slowing down, many of these high-flying stocks could see their valuations contract. A slowdown in AI could lead to reduced revenue growth forecasts, which would make investors less willing to pay high multiples for these stocks.

3. Tariffs Impacting Earnings

• Hurt Corporate Profits: A tariff war typically results in higher costs for companies, which can squeeze margins. Companies that rely on global supply chains—especially those in industries like manufacturing, automotive, and consumer goods—could face increased input costs as a result of tariffs. If these companies are unable to pass on the higher costs to consumers, their profits could take a hit, which would negatively affect their stock prices.
• Sector-Specific Struggles: Some sectors are more vulnerable to tariffs than others. For example, industries heavily dependent on cross-border trade, such as the automotive sector (with US-Canada integration) or agriculture (such as Canadian exports of beef and pork to the US), could see earnings projections revised downward. The tariff impact could also negatively affect industries in both countries, leading to broad declines in specific stocks or sectors.

4. Sector Rotation

• Shift Away from Tech: If investor confidence in AI-driven growth diminishes, there could be a shift in favor of more traditional, less speculative sectors. Investors might rotate out of tech stocks and into sectors seen as more stable, such as utilities, healthcare, or consumer staples. These sectors tend to be less sensitive to both tariff wars and the rapid changes in technology.
• Commodity and Energy Sectors: On the other hand, the impact of tariffs on commodities (such as metals or agricultural products) could create opportunities in commodity stocks. If tariffs disrupt supply chains and production, commodity prices could rise, which would benefit energy or mining companies. However, if global demand falls due to a broader slowdown in trade, these sectors could also suffer.

5. Investor Sentiment and Risk Appetite

• Risk-Off Sentiment: The combination of a tariff war and AI concerns could contribute to a “risk-off” sentiment, where investors become more cautious and look for safer assets. This could result in increased demand for traditional safe-haven assets like gold, government bonds, or even the US dollar. Stock markets could be weighed down by this shift in investor risk appetite, particularly if the tariff dispute leads to a perceived slowdown in global growth.
• Capital Flows: The uncertainty caused by a trade war combined with slowing AI growth could result in capital flowing out of equity markets and into other asset classes, such as bonds, or even foreign markets that are seen as less impacted by these risks. Emerging markets, for example, could be hit harder by tariff disruptions, further causing a shift away from international stocks toward more stable or less affected regions.

6. Global Economic Implications

• Slower Economic Growth: A tariff war typically reduces global trade volumes, which can hurt overall economic growth. When combined with a slowdown in AI-driven sectors that had been fueling growth in tech-heavy stock markets, this could result in lower growth expectations for both the US and Canada, and potentially other countries that rely heavily on trade. Slower growth expectations can lead to downward revisions in corporate earnings forecasts, which is usually negative for stocks.
• Central Bank Responses: In response to potential economic slowdowns, central banks may take action by lowering interest rates or engaging in monetary stimulus. However, the effectiveness of these policies may be limited if the economic downturn is driven by external trade factors or structural issues in the tech sector. While lower interest rates could provide some support for stocks, they might not be enough to fully counterbalance the negative effects of tariffs or a cooling AI sector.

7. Long-Term Consequences for the Tech Industry

• AI Innovation and Investment Shifts: The concerns around AI, specifically regarding challenges like Deep Seek’s AI pushback, could change the trajectory of investment in the sector. If innovation in AI faces significant hurdles, such as regulatory scrutiny or technological limitations, investor expectations could become more tempered. This could result in a slowdown in venture capital funding for AI startups, as well as reduced research and development (R&D) budgets for larger firms.
• AI’s Impact on Other Industries: On the flip side, the slowing of AI innovation might also impact industries outside of tech that had been expecting rapid transformations (e.g., healthcare, finance, and retail). Reduced AI implementation could lead to missed opportunities for cost savings, productivity gains, and new business models, affecting long-term market growth.

Outlook:

The combination of a tariff war between the US and Canada, along with concerns about the slowdown of AI-driven growth, could lead to significant stress on the stock market. The risks of a slowdown in trade, higher costs, and decreased investor confidence in AI stocks could result in market volatility, sector rotations, and downward revisions in earnings forecasts. While safe-haven assets like bonds and gold might benefit, many growth stocks—especially in the tech sector—could face declines as market sentiment shifts. It’s essential for investors to carefully monitor both geopolitical developments (such as the tariff war) and economic indicators related to AI growth, as these factors could significantly influence market dynamics in the near term.