AI Euphoria Vs. Tariff Shock: Can Tech Optimism Keep Markets Rising in 2025?

In a year defined by geopolitical friction and technological breakthroughs, financial markets in 2025 are showcasing an extraordinary paradox. On one hand, the resurgence of U.S.-China tariff tensions has triggered fears of inflation, supply chain disruptions, and weakened global trade. On the other hand, artificial intelligence (AI) optimism has reached euphoric levels, propelling tech-heavy indices like the and to new highs.

This divergence begs the question: Can AI-fueled investor enthusiasm sustain the bull market despite rising geopolitical and macroeconomic headwinds? Or are we seeing a temporary rally fueled more by psychology than fundamentals?

Tariffs and Their Market Ripples

The Biden administration’s proposed tariffs on $18 billion worth of Chinese goods including EVs, chips, and minerals have reignited global trade tensions. These measures, framed as an effort to protect domestic industries and mitigate national security risks, mimic the 2018-19 U.S.-China trade war, which spurred volatility across manufacturing, tech, and commodity markets.

Economists warn that these tariffs function as a “hidden tax”, elevating input costs for manufacturers and end-user prices for consumers. Historically, such friction has led to market pullbacks. For instance, in April 2025, global indices lost more than $3 trillion in equity value over a single week in response to the tariff announcement.

Yet the correction was brief tech stocks, especially AI-related companies, led a swift rebound, suggesting that investor sentiment may be more narrative-driven than data- driven.

AI: The Market’s New Safety Net?

Artificial intelligence has become a structural pillar of optimism in global markets. Giants like Nvidia (NASDAQ:), Microsoft (NASDAQ:), and Alphabet (NASDAQ:) continue to exceed earnings expectations, driven by demand for AI infrastructure, cloud computing, and LLM integrations across industries.

According to McKinsey, AI adoption could add up to $7 trillion to global GDP by 2030, with early gains already visible in automation, fintech, logistics, and energy.

This optimism is reflected in fund flows. AI-focused ETFs have absorbed billions in inflows in H1 2025, outpacing every other sector.

AI Stocks vs S&P 500 Performance (Jan,July 2025)

(Source: Yahoo Finance, Nasdaq Market Data)

While this shift toward innovation is encouraging, it also raises flags: Is AI serving as a behavioral hedge, a story investor turns to uncertain times rather than a fully priced asset class?

Behavioral Finance Context: How Psychology Drives Divergence

To understand why AI euphoria persists despite tariff threats, we turn to behavioral finances specifically three phenomena:

• Narrative Economics: Coined by Nobel Laureate Robert Shiller, this theory explains how viral stories dominate investor thinking. AI is today’s strongest narrative. Its coverage in media, earnings calls, and analyst briefings has made it the investment story of the decade.

• Availability Bias: Investors give more weight to information that is easily available or frequently discussed. With AI constantly in the news, it gains a psychological premium over less “exciting” sectors like manufacturing or retail even when the fundamentals may not support it.

• Herd Behavior: As institutional investors allocate to AI-heavy portfolios, retail investors follow to avoid missing out. In a 2025 sentiment survey, 63% of retail investors said they were influenced by “momentum flows” into tech ETFs rather than underlying earnings potential.

Figure 2: Market Sentiment Index , AI Optimism vs Tariff Risk (Jan,June 2025)

This bifurcation in behavior optimism for tech, pessimism for trade suggests that markets may be pricing hope, not risk.

Data Tables and Sector Divergence

Empirical data supports this behavioral lens. Here’s how global investment trends have shifted:

Table 1: Global Investment Trends , Tech vs Non-Tech Sectors (USD Billion)

Source: Global Fund Inflows Data, 2025

The increasing divergence suggests that capital allocation is being driven more by innovation stories than cyclical fundamentals. In contrast, sectors vulnerable to tariffs such as industrials, autos, and energy are seeing flat or negative flows.

While AI thrives, tariff-sensitive industries are experiencing:

• Rising costs: Due to imported components (e.g., EV batteries, rare earths)

• Margin pressure: Firms reliant on export markets are lowering guidance

• Slower hiring: Job growth in manufacturing slowed by 1.3% YoY in Q2 2025

Figure 3: Impact of Tariffs on Global Semiconductor Sector Revenue (USD Billion)

(Source: McKinsey Semiconductor Report 2024)

Despite these pressures, market-wide volatility remains muted. Why? Because the AI narrative continues to outweigh the impact of trade data in the eyes of investors.

Divergence Risk: What Happens When the Story Breaks?

While AI may very well deliver long-term gains, overexposure to narrative-driven momentum leaves investors vulnerable to sharp corrections.

Here’s how divergence could resolve:

This framework helps identify potential inflection points, especially heading into Q4 2025.

Investor Takeaways and Forward Strategy

Investors and traders must now navigate cognitive dissonance acknowledging that markets are rising while risk factors deepen. A few takeaways:

• Diversify with intent: Avoid overweighting AI despite short-term gains. Balance with low-correlation assets.

• Monitor bond yields: The U.S. 10Y yield briefly touched 4.35% in May, signaling inflation and policy risk.

• Use tactical indicators: Pair narrative analysis with volatility indices (e.g., ), and macro surprise indexes.

• Stay psychologically self-aware: Recognize when emotion, FOMO, or media hype is driving your portfolio.

Global Rotation , Sector Inflows & Outflows H1 2025

(Source: Investing.com Sector Fund Tracker)

Conclusion: Fragile Optimism or Rational Repricing?

2025 may well be remembered as the year AI optimism battled geopolitical turbulence for market control. So far, tech is winning but the war isn’t over. Tariffs, inflation, rate uncertainty, and fiscal drag remain potent forces. Behavioral finance suggests that when sentiment runs ahead of fundamentals, corrections often follow. Still, if AI productivity

gains materialize faster than expected, the current divergence may not be irrational, may be a repricing of leadership in a new economic era.

For now, staying grounded in both data and discipline is the wisest hedge against volatility.

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Dr. Belavadi Nikhil is an Assistant Professor of Finance at Woxsen University, Hyderabad, India. He holds a Ph.D. in Banking and Finance from the Central University of Karnataka and has published research on monetary policy, equity markets, sustainable finance, and behavioural economics. His work often blends empirical finance with real- world policy implications, offering data-driven perspectives for investors and practitioners alike. 

Sources

• U.S. Trade Representative Office , 2025 Tariff Proposal Brief

• McKinsey & Co , Global AI Outlook 2025

• Reuters, Bloomberg , Market Reports (Jan,July 2025)

• Shiller, R. (2019). Narrative Economics

• Investing.com Sector Sentiment Tracker, July 2025

• BCA Research , Global Behavioral Sentiment Index, Q2 2025