Easing tensions over Taiwan could ripple through the chip stocks powering the AI boom

President Donald Trump greets Chinese President Xi Jinping on Wednesday at Joint Base Andrews, Md.

Wall Street will spend this week obsessing over tariffs, trade and Iran as President Donald Trump meets Chinese President Xi Jinping.

But anyone who owns U.S. tech stocks should watch Taiwan.

Xi is expected to press Trump to reduce or halt U.S. arms sales to Taiwan, according to Reuters. Trump has already approved roughly $11 billion in weapons sales this year, while another $14 billion package has been delayed as negotiations with Beijing continue.

That creates an intriguing setup for investors, as Taiwan sits at the center of the global semiconductor supply chain. Taiwan Semiconductor Manufacturing (TSM) manufactures many of the advanced chips designed by Nvidia (NVDA), Advanced Micro Devices (AMD), Apple (AAPL) and other companies driving the artificial intelligence boom.

At a basic level, if Nvidia is the designer of the brains behind the AI boom, TSMC is the company that assembles them. And while the U.S. tries to ramp up its chip manufacturing base via investments in companies like Intel (INTC), meaningful onshoring is still years away.

That means a genuine reduction in tensions between China and Taiwan could remove some of the geopolitical discount investors have applied to Taiwanese-linked assets for decades, a risk that also hangs over some of the hottest U.S.-listed AI stocks.

And history suggests that trade is real.

We've seen a Taiwan 'peace dividend' before

Back in 2008, Ma Ying-jeou won Taiwan's presidential election after campaigning on improving economic and political relations with Beijing. On the first trading day following his victory, Taiwan's Taiex index TW:Y9999 jumped nearly 4% and the Taiwan dollar strengthened dramatically. By mid-May, the Taiex was up roughly 8% for the year and leading major Asian markets.

Investors were effectively paying more for Taiwanese assets because they believed the probability of a conflict with China had fallen.

That distinction matters. Taiwan's chipmakers won't suddenly produce more chips because Trump and Xi struck an agreement over Taiwan. The company wouldn't need to, as investors would simply be willing to pay a higher multiple for the earnings companies like TSMC already generate.

That is the potential catalyst: a "peace dividend" that lowers geopolitical risk premium. And the stakes are much higher in 2026 compared to 2008.

TSMC generated $142 billion in sales in the past year, a massive 32% increase as AI chip demand swells. But with the company's most advanced manufacturing facilities in Taiwan, major U.S. tech companies are dependent on a key company in the middle of a geopolitical hot spot.

That means the geographic risk is concentrated in Taiwan, with much of the downstream economic risk sits with American companies.

A handshake won't be enough

It would be naïve to assume any Trump-Xi agreement involving Taiwan would automatically be bullish.

History gives us a useful warning. Xi met then-Taiwanese President Ma Ying-jeou in Singapore in 2015, the first meeting between leaders of the two sides since 1949. It sounded like the ultimate peace-dividend catalyst.

But Mr. Market shrugged; Taiwanese stocks failed to generate a sustained rally as investors viewed the meeting as symbolic, with few economic consequences.

That lesson applies directly to this week's summit. A statement saying both countries support peace won't move TSMC very far. Investors should instead watch whether China reduces military pressure around Taiwan, military-to-military communications improve, commercial shipping becomes safer and whether semiconductor restrictions stabilize.

Reciprocity will be particularly important. If Washington limits arms sales while Beijing simultaneously reduces military exercises and coercive activity around Taiwan, investors could reasonably conclude that the probability of conflict has fallen.

On the other hand, a deal that weakens Taiwan's deterrence while Chinese military pressure continues could produce a very different market reaction. The initial headlines might sound like détente even as investors eventually demand a larger geopolitical discount on Taiwanese assets.

Markets have learned to ignore the saber-rattling

Another lesson from recent history is equally important.

Investors have become surprisingly numb to Chinese military exercises around Taiwan.

In October 2021, China sent a then-record 149 military jets into Taiwan's air-defense identification zone over a four-day period.

And after Rep. Nancy Pelosi visited Taiwan in August 2022, Beijing launched large-scale live-fire military drills encircling Taiwan.

Shortly after, satellite imagery showed the Chinese military had constructed a near-exact replica of Taipei's central government district in Inner Mongolia where they could simulate a Taiwanese invasion.

Yet these displays have generated increasingly short-lived market reactions. Investors have learned that military exercises usually end without disrupting commerce. And that complacency creates an unusual setup.

Another two-day military exercise may barely register with investors. Ships being inspected, diverted or blocked would be a completely different story. More than $2.4 trillion of goods moved through the Taiwan Strait in 2024, equivalent to roughly 21% of global maritime trade, according to CSIS.

Taiwan risk therefore runs through two enormous arteries of the global economy: semiconductors and shipping.

The hidden AI trade

Taiwan Semiconductor is the clearest way to play a genuine decline in Taiwan risk.

The iShares MSCI Taiwan ETF EWT provides broader exposure to Taiwanese equities, while semiconductor ETFs such as the VanEck Semiconductor ETF SMH could benefit from a lower probability of disruption to the global chip supply chain. Semiconductor-equipment companies such as KLA Corp. (KLAC), Applied Materials (AMAT) and Lam Research (LRCX) could benefit from greater confidence in long-term fabrication investment. I have a smaller, higher-upside stock I will discuss in my next issue of "Let's Analyze" on Substack. If you want to get an email when the trade goes live, you can sign up here for free.

But regardless how you play it, it's clear markets have learned to price Chinese threats toward Taiwan. They have had far fewer opportunities to price a meaningful and durable reduction in that risk.

If the Trump-Xi summit moves the relationship in that direction, the clearest "peace dividend" may show up first in TSMC and the semiconductor ecosystem surrounding it.

DISCLOSURE: The author owns TSMC and Apple stocks.

Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing." A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly "Room to Run" podcast.

-Robert Ross