Could Trump Pop the AI Bubble?

With the November elections less than five months away, the market has been amazingly complacent and oblivious about the potential shock that, frankly, either Presidency would unleash. But that's about to change.

As Goldman trader John Flood warns in a weekend note, the results of the upcoming US Presidential election could have a substantial impact on the USD and the relative performance of domestic-facing vs. internationally-exposed firms. As @Citrini7 mentioned earlier, a likely Trump election and Republican sweep would carry big implications for the bond market. The first presidential debate is scheduled for this Thursday, June 27th.

And, as attention finally starts to turn to the outcome of the elections, Goldman economists expect the dollar to strengthen under a Republican White House victory regardless of whether there is a sweep or divided government. That's because, as @Citrini7 discussed at length here, Trump has floated several potential tariff policies, including a 10% across-the-board tariff on imports along with a 60% tariff on imports from China, all of which would spark a sharp increase in inflation.

And, as Goldman notes, "tariff increases appear likely in the event of a Trump victory and would likely strengthen the USD."

The bank goes on to caution that tariffs would create a headwind to the performance of stocks with high international revenue exposure due to the risk of retaliatory tariffs as well as heightened geopolitical tensions. It may come as a shock to some that Tech has the highest international sales exposures with a whopping 59% of total revenues (and 17% is purely EM), while Cyclicals are in second place.

In addition to companies with elevated international revenues, companies that are dependent on international suppliers would also face headwinds from tariffs. Goldman screened S&P 500 goods companies into groups of stocks with the largest exposure to suppliers from the US, suppliers outside the US, and suppliers in Greater China specifically.

Once again, the median Tech Hardware stock has the greatest exposure to suppliers from Greater China while the median Broadline Retail stock has the greatest exposure to domestic suppliers.

On the right in the second image, Goldman shows that an equal-weighted portfolio of stocks most exposed to suppliers from Greater China (excluding Tech) has lagged a similarly-constructed portfolio of stocks most exposed to suppliers from the U.S. by 18% since last fall. The relative performance of these two groups has generally moved with prediction market odds of a Trump presidency.

Of course, if one also adds Big Tech to this portfolio of stocks exposed to China suppliers, one gets an exponential melt-up... which is why anyone looking for the pin that pops the mega tech/AI bubble should look no further than Trump's victory on November 5.

🔗 Goldman