I Said Highs, We Got Highs; Next Up, A Likely Breakout After A US-China Deal

The author maintains a bullish outlook on broader markets, anticipating an S&P 500 breakout driven by a potential US-China trade deal expected around August 12. A new 15% charge on Nvidia and AMD's AI chip sales to China, framed as a US government revenue stream to offset deficit increases, has seen minimal market reaction and is viewed as potentially easing trade tensions by not directly taxing China. However, China's significant leverage in rare earth elements and its own advanced AI chip development could complicate negotiations, potentially leading to a less favorable deal for the US despite the perceived mutual incentives.

Analysis

The provided analysis presents a strongly bullish outlook for the broader market, specifically the S&P 500, predicated on an anticipated US-China trade deal around August 12. A key development is the US government's new policy to take 15% of the revenue from Nvidia's H20 and AMD's MI308 AI chip sales to China. The market's muted reaction, with Nvidia down 0.45% and AMD down 1.3% pre-market, is interpreted as insignificant. The author frames this policy not as a punitive tariff but as a creative revenue stream to help address the growing US fiscal deficit, which has reached $1.6 trillion in the first ten months of fiscal 2025 and is projected to increase by $4.1 trillion over the next decade. This new revenue is estimated to be worth approximately $2.7 billion this fiscal year and could exceed $100 billion over ten years. The central catalyst for the market is a potential trade deal, where the US seeks access to China's Rare Earth Elements (REEs)—a market where China controls 91% of refined production—in exchange for China's access to US GPUs. However, a significant counterpoint is noted: China's advancing domestic AI technology, exemplified by Huawei's CloudMatrix 384 system which reportedly outperforms Nvidia's GB200, reduces its dependency on US chips and weakens the US negotiating position.

Key Decisions for Investors

• Monitor the outcome of US-China trade negotiations around August 12, as a favorable deal or an extension of the current tariff pause is positioned as the primary catalyst for a potential market breakout.
• For positions in Nvidia and AMD, consider that the market has seemingly absorbed the impact of the 15% revenue charge on China sales, but watch for any changes to average selling prices or future earnings guidance related to this policy.
• Acknowledge the primary risk to the bullish thesis: China's leverage from its dominance in Rare Earth Elements and its rapidly advancing domestic AI chip capabilities could result in a trade deal unfavorable to the US, potentially triggering a market selloff.
• Note the emerging US strategy of using targeted revenue-sharing mandates on tech exports as a tool for fiscal policy, a trend that could impact other sectors involved in critical technology trade with China.