Chip Rally Faces 2 Big Risks in Trump-Xi Summit This Week

A blistering rally in semiconductor stocks faces two significant geopolitical tests this week, as a Gavekal Research note warns that the upcoming summit between US President Donald Trump and Chinese President Xi Jinping on May 14-15 could disrupt the sector’s recent momentum.

“Needless to say, a ‘rare earth for ASML lithography machines’ deal would open the door to much lower chip prices down the road,” Louis-Vincent Gave, CEO at Gavekal Research, wrote in a note Monday.

The PHLX Semiconductor Index recently posted its largest 25-day rally since the dot-com bubble in 2000, with AI-related names like Intel (INTC) and Micron (MU) surging. The rally has been concentrated, however, with only 40% of S&P 500 constituents having recovered to pre-war levels. The summit also comes as the US grapples with conflict-driven inflation pressures while China seeks to solidify a fragile economic recovery.

At stake is the profitability of the entire semiconductor industry. If China gains access to high-end lithography tools from Dutch firm ASML—long banned from selling its most advanced machines to Beijing—it could dramatically increase global chip supply, eroding the pricing power of incumbents like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.

The ASML Question

The core of the issue, according to Gave, is a potential trade-off where Trump seeks to replenish the US stockpile of rare-earth materials, of which China is the dominant producer, in exchange for allowing China to purchase ASML’s extreme ultraviolet (EUV) lithography machines. Such a deal would provide a massive boost to China's goal of semiconductor self-sufficiency.

This would directly threaten the market share and high margins enjoyed by industry leaders. Investors have so far priced in continued strong demand for artificial intelligence infrastructure, which has powered stocks like AMD (up 26.3% to a record high on strong data center sales) and Super Micro Computer (up 30.6% despite missing revenue estimates). A sudden increase in Chinese production capacity would force a repricing of these valuations.

Taiwan and Iran Risks Compound Uncertainty

Beyond a potential chip deal, the summit carries other risks that Gavekal suggests investors may not be fully pricing in. The ongoing Iran war, which will be a major topic of discussion, threatens to jeopardize Middle Eastern financing for data centers and complicates the path for central banks to cut interest rates. The US is pressing China, the largest buyer of Iranian oil, to use its influence to reopen the Strait of Hormuz.

Taiwan also remains a critical flashpoint. Beijing has signaled that the island democracy is the "biggest risk" in the bilateral relationship. While the Trump administration authorized an $11 billion arms package for Taiwan, the president’s transactional approach and comments about Taiwan “stealing” America’s semiconductor business have raised concerns. According to Patricia Kim of the Brookings Institution, there is a risk that President Trump “may make an off-the-cuff remark” that deviates from long-standing US policy, creating fresh market uncertainty.

While some analysts, like former State Department official Edgard Kagan, believe Trump is unlikely to "sacrifice U.S. interests in Taiwan," the island's best-case scenario, according to National Taiwan University professor Lev Nachman, is that it is "not talked about publicly."

This article is for informational purposes only and does not constitute investment advice.