How The Tech Selloff Could Undercut The Engine Of Trump’s Economy

The AI-driven stock market rally that helped keep President Donald Trump’s economy steady through the height of the Iran war is sputtering.

Shares of the largest companies on the tech-focused Nasdaq stock exchange have slid over the last month, and the losses have accelerated this week as investors grow wary of the potential risks posed by massive AI spending plans. Semiconductor stocks plunged on Tuesday after Asian tech giants notched big losses overnight. And shares of Elon Musk’s SpaceX have fallen by 20 percent since peaking last week — briefly trading below where they priced in the recent blockbuster public offering.

Trump has staked his economic agenda on the advancement of large artificial intelligence businesses that have quickly become major drivers of U.S. growth. Wall Street has celebrated their rise, and investor enthusiasm has generated hundreds of billions of dollars in wealth — largely to the benefit of high-income households — that has fueled household spending.

If the AI bulls on Wall Street lose steam and the sell-off continues, it would diminish the public’s spending power at a time just as Trump is trying to turn the corner on extremely negative economic polling.

"If something were to dent the confidence of that top 10 percent, that would have a ripple effect into the real economy,” said Scott Clemons, a partner and the chief investment strategist at Brown Brothers Harriman. "I can’t help but wonder if there’s not a tighter relationship between Wall Street and Main Street than has usually been the case."

The AI investment surge has been a bright spot for Trump even as consumer sentiment surveys show broad-based pessimism about the state of the economy. Wall Street banks project that the largest AI companies will spend more than $700 billion on capital projects this year, and researchers at the Federal Reserve Bank of St. Louis estimate that AI contributed nearly a full percentage point to real growth through the first three quarters of 2025.

Michael Cembalest, the chair of market and investment strategy for JPMorgan Asset and Wealth Management, said in an investor note that the administration is "fortunate that AI is offsetting the growth-dampening impacts of some of its policies.”

The scale of that buildout has become an important component of Trump’s political messaging on the economy. At a rally in Pennsylvania on Tuesday, the president said, “We have more factories being built — and I mean car factories, AI factories, factories of every type — than we’ve ever had in the history of our country.”

The White House did not immediately respond to a request for comment.

Few expect the demand for AI infrastructure to reverse. But there are signs investors are tempering expectations on how the boom will continue to push up stocks.

There are questions about when the billions of dollars that large-scale cloud computing companies like Amazon and Google, known as hyperscalers, are spending on new data centers and infrastructure projects will generate returns. The cost of top AI models has already led some business leaders to explore cheaper alternatives, including models from the Chinese firm DeepSeek. The emergence of that company's AI capabilities triggered a stock market swoon early last year.

Late Monday, analysts at Goldman Sachs told clients that the market has grown “more vulnerable to any news that challenges” optimistic assessments of future gains.

Meanwhile, Federal Reserve Chair Kevin Warsh struck a hawkish tone on inflation at his debut press conference last week, which raises the risk that many AI firms may soon face higher borrowing costs to finance their expansion. While the economy remains on solid footing, that collection of hurdles has started to weigh on Wall Street sentiment.

“There is a vulnerability [in] the system. If you look at what’s lifting market performance, but also economic performance, everything is coming back to AI,” Philip Straehl, the chief investment officer for the Americas at Morningstar Wealth, said on Tuesday.

Expectations for higher interest rates encourage restraint, he added, and it’s not clear how the hyperscalers are “going to make the money back effectively on the capex that they’re spending.”

Still, many Wall Street analysts believe there is room to run.

It’s likely that some of the sell-off reflects traders who are capturing the gains they’ve made since the start of the year. Even with recent losses, the Nasdaq 100 has climbed by more than 16 percent this year. Some, including Straehl, make the case that investors may benefit from diversifying their holdings into sectors that are less exposed to the sky-high expectations of future AI growth.

“We believe today’s pullback likely reflects profit-taking following a strong rally from the March lows,” Brock Weimer, an analyst focused on investment strategy at Edward Jones, said on Tuesday. The market and the underlying economy remain fundamentally strong, he added, but “we believe diversification remains key to managing risk, particularly after the strong gains in technology and other growth-oriented segments of the market.”