By Tae Kim

The artificial-intelligence trade is going through a challenging stretch with stock prices of AI-related names well off their highs. The iShares Future AI & Tech ETF has declined 12% over the past seven trading sessions alone.

Much of the recent market volatility can be attributed to uncertainty surrounding future government policy. Since taking office President Donald Trump has frequently threatened to impose new tariffs. On Thursday, Trump announced that tariffs on Canada, Mexico, and an additional tariff on China would take effect on March 4. It triggered a substantial selloff for AI companies.

Investors, however, should look beyond the political noise. While tariffs may be implemented, any overly onerous measures are likely to result in a significant stock market drop, and history suggests the administration is then likely to backtrack on such policies.

Meanwhile, the fundamentals surrounding AI are still strong and improving. Ironically, some skeptics believed that innovations from Chinese start-up DeepSeek would decrease demand for AI infrastructure, when it's actually driving a substantial increase in demand for AI computing resources.

The latest AI models from DeepSeek, OpenAI, Anthropic, and xAI incorporate a new reasoning feature that allows AI models to reflect more thoroughly on a query by performing numerous thought computations before providing a higher-quality, longer response. Nvidia CEO Jensen Huang said this week that reasoning consumes 100 times more computing resources compared with previous AI models.

And there are other signs from top companies and start-ups that they're overwhelmed by AI demand and still can't purchase enough AI chips. On Thursday, amid the market selloff, OpenAI CEO Sam Altman said on social media that his company is suffering from a GPU shortage due to incredible usage growth for ChatGPT. OpenAI uses Nvidia AI chips. Earlier the same day, Amazon CEO Andy Jassy told Bloomberg News that there was "insatiable demand" for AI, and that his company could use more AI chips to meet customer demand.

While there is likely to be short-term bumps this year, evidence continues to pile up that the core growth trend for AI remains on track.

Investors should still be careful. Not every company will benefit from AI equally. There will be winners and losers. In November, I wrote that three stocks -- Nvidia, Vertiv, and Oracle -- were best positioned to capitalize on the trend this year with their strong competitive positions in the AI data center. I still believe that to be the case.

Write to Tae Kim at tae.kim@barrons.com

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February 28, 2025 12:26 ET (17:26 GMT)

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