Before geopolitics moved to the foreground, AI was the dominant force shaping equity markets. By late last year, however, enthusiasm had begun to fade. Concerns around debt‑funded AI capex, circular investment dynamics among large tech firms, and elevated valuations weighed on sentiment. In February, those worries intensified as rapid AI advances threatened to disrupt incumbent digital business models, triggering a sharp sell‑off and raising questions about whether the long-running tech rally had finally peaked.
That narrative reversed quickly. As conflict-driven energy shocks unsettled markets in March— hitting cyclicals and international equities particularly hard, especially in Europe and Asia—U.S. technology stocks reasserted themselves as a perceived safe haven. Semiconductors, hardware, and software stocks stabilized and, notably, even outperformed defense stocks. While this relative performance during a geopolitical shock is unusual, it reinforces the view that tech’s earnings resilience and structural growth remain attractive amid rising macro uncertainty.
Yet this renewed appetite risks obscuring important vulnerabilities. Beneath the surface, global technology supply chains—especially semiconductors—are highly exposed to geopolitical disruption, both directly through energy dependence and indirectly through critical inputs.
Semiconductor manufacturing is highly energy-intensive and depends on uninterrupted power; even brief outages can destroy wafers and halt production. This creates a significant vulnerability given the geographic concentration of advanced chipmaking. Taiwan’s TSMC and South Korea’s Samsung dominate global supply, with Taiwan alone producing more than 90% of advanced semiconductors. Both economies are heavily reliant on imported energy, leaving this critical supply chain exposed to Middle East tensions.
Around 60–70% of crude oil imports into Korea and Taiwan transit the Strait of Hormuz. While both governments report sizeable strategic oil reserves—roughly 100 days for Taiwan and over 200 days for Korea—a supply disruption of liquefied natural gas (LNG) presents a more acute risk. LNG stockpiles are thinner, and Taiwan relies heavily on gas for electricity generation, with an estimated quarter of electricity production linked directly to the tech sector.
Some mitigating factors exist. Less than a quarter of Taiwan’s LNG imports pass through the Strait of Hormuz, and officials have indicated the island could operate without major disruption even if Middle Eastern LNG supplies were fully cut. In extreme cases, policymakers have also signaled a willingness to increase coal usage as a temporary backstop.
Still, the risks are asymmetric. Recent attacks on energy infrastructure and the risk of Yemen’s Houthis blocking the Bab al-Mandeb Strait—another vital shipping route—raise the possibility of persistently higher energy prices, which would push up production costs for energy-intensive manufacturing. More importantly, a prolonged LNG disruption could create secondary bottlenecks through gas‑dependent chemical inputs essential to chip production, amplifying supply‑chain stress.
Energy is not the only pressure point. Semiconductor manufacturing also depends on a narrow set of specialized materials, several of which are sourced from geopolitically sensitive regions. Helium, for example, is used in chip fabrication and is largely produced as a byproduct of natural gas processing, and roughly one‑third of the global helium supply comes from the Middle East and passes through the Strait of Hormuz.
This vulnerability is not theoretical. In 2023, the Semiconductor Industry Association warned that disruptions to helium supply could severely impair global chip production. Those concerns resurfaced sharply in March when Qatar, responsible for around a third of global helium output, halted production following an Iranian drone attack. Any sustained disruption would have direct implications for semiconductor output and, by extension, the broader tech sector.
Other critical inputs are similarly exposed. Bromine, used in the precision etching of silicon wafers, is largely sourced from Israel and Jordan. The concentration of these inputs leaves semiconductor supply chains vulnerable to spillovers from regional instability, even in countries otherwise viewed as insulated from the conflict.
The world has seen this dynamic before. During COVID, semiconductor shortages rippled across industries, most visibly disrupting auto production. That experience prompted a push toward domestic chip manufacturing, particularly in the U.S. and Europe. While those efforts continue, advanced semiconductor supply remains heavily dependent on external partners exposed to current geopolitical risks.
In an AI‑driven world, semiconductors are not merely an upstream input; they are foundational to everything from consumer electronics and industrial systems to modern defense and energy infrastructure. As AI demand accelerates, even modest supply disruptions, whether from higher costs or outright shortages, can slow deployment and cascade across the broader economy.
If geopolitical tensions slow the AI build‑out, investor expectations could be challenged. Much of the market’s enthusiasm for hyperscalers rests on anticipated productivity gains from sustained AI capex. Any disruption to those investment plans could disappoint, with broad market implications given the outsized weight of the top five tech stocks in the S&P 500.
Technology remains a core allocation for portfolios, and its recent resilience during the energy shock highlights why investors continue to lean on its high-growth, high-profit profile. But that resilience should not be mistaken for insulation. Tech supply chains remain exposed to disruptions in energy and critical inputs, suggesting recent performance may be masking latent fragilities.
At the same time, AI‑related disruption risks have not disappeared. Once geopolitical tensions either ease or fade into the background, markets are likely to refocus on which business models, particularly in software and services, are vulnerable to AI‑driven displacement. Dispersion between winners and laggards within the sector will likely widen.
Taken together, these dynamics argue against indiscriminately adding tech exposure simply because valuations have moderated or because geopolitics has temporarily diverted attention from AI risks. Selectivity and diversification remain essential, not only to manage concentration risk as tech now accounts for roughly a third of the S&P 500, but also to navigate an increasingly fragmented and volatile macro environment.
Footnotes
Barclays Research, “Middle East disruption also exposes a tail risk to semiconductors”
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