Investors pivoted back to policy-driven trading on Wednesday after Nvidia CEO Jensen Huang was added to President Trump's China delegation, reigniting hopes for renewed U.S. chip sales to the world's second-largest economy. The move lifted Nasdaq 100 futures by 0.82% in premarket trading, while the Dow Jones Industrial Average futures edged lower, underscoring the narrow focus of the rally.
Policy Shift Fuels AI Stock Rebound
Memory chipmaker Micron Technology Inc. (MU) surged 6.2% in premarket trading, leading a broad recovery in semiconductor shares after Tuesday's pullback. The Philadelphia Semiconductor Index has soared 64% since March 30, far outpacing the S&P 500's 17% gain, and chip stocks have accounted for 70% of the $5.1 trillion in market value added to the S&P 500 this year.
The catalyst was not a new product launch or earnings beat, but the prospect of Washington easing restrictions on advanced AI chip sales to China. Nvidia has struggled to obtain permission to sell its H200 artificial-intelligence chips in China, and any policy shift would not immediately boost revenue. However, it would restore the option value for investors to price in China as a potential growth market again.
Rate Cut Hopes Fade, Pressuring High-Multiple Stocks
The macro backdrop remains challenging for high-valuation AI stocks. Prediction markets Polymarket and Kalshi both show traders expect no Federal Reserve rate cuts in 2026, with Polymarket assigning a 70% probability and Kalshi's leading outcome at 63%. The odds of at least a 25-basis-point rate hike in December have risen above 35%, according to CME data, up from below 22% earlier this week.
This rate environment makes it harder to justify the lofty multiples of AI stocks without consistent earnings growth. The market is simultaneously pricing two risks: Tuesday's inflation shock, which hurt long-duration growth stocks, and today's China headline, which gave buyers a reason to defend the AI trade.
Fundamentals Support the Bull Case
Despite the policy-driven rally, the bull case rests on real AI infrastructure spending. Advanced Micro Devices Inc. (AMD) reported first-quarter data-center revenue of $5.8 billion, up 57% year-over-year, and guided second-quarter revenue to $11.2 billion, above Wall Street estimates. CEO Lisa Su said the data center is now the primary driver of revenue and earnings growth.
Nvidia Corp. (NVDA) reported fiscal fourth-quarter revenue of $68.1 billion, up 73% from a year earlier, with data-center revenue up 75% to $62.3 billion. The company guided for $78 billion in fiscal first-quarter revenue, excluding any contribution from China data-center compute sales. Broadcom Inc. (AVGO) also posted strong results, with first-quarter AI revenue growing 106% to $8.4 billion, driven by custom AI accelerators and networking. The company's deal with Google to supply custom AI chips through 2031 positions it as a key proxy for hyperscaler spending.
Bearish Risks Loom
Morgan Stanley Wealth Management's Steve Edwards noted there is enough of a fundamental story behind the rally, but Chase Investment Counsel's Peter Tuz questioned whether things are getting too ebullient. Michael Burry's bearish bets on a semiconductor ETF add to the cautious tone.
Supply-chain risks also threaten the AI buildout. Samsung, a key AI-memory supplier, failed to reach a pay deal with its union, raising the risk of an 18-day strike starting May 21 involving over 50,000 workers. Such a walkout could delay shipments and push chip prices higher, benefiting rivals SK Hynix and Micron on pricing but reminding investors that the AI expansion depends on labor, capacity, power, and politics.
Outlook: The Easy Chart Has Gone
The AI trade is no longer a clean upward line. If China access opens even slightly and earnings continue to convert AI spending into revenue, the rally has fuel. But if rates rise and the trade stays crowded, the same stocks can fall on good news. For now, the market is moving on access, not innovation, and that makes the next move highly dependent on policy and macro conditions.
