Taiwan's equities market was an investor darling in 2024, outperforming the rest of Asia in large part due to excitement over artificial intelligence. That momentum has not carried over into 2025, as tariff fears and fading AI buzz take some of the shine off Taiwanese stocks.

The benchmark Taiex index shed 10% in the first quarter of the year as foreign investors pulled money out of the market, worried about the impact U.S. President Trump's trade policies will have on export-reliant Taiwan and industry leaders like TSMC that contribute significantly to the economy.

Ahead of "Liberation Day" on April 2, when Trump is due to announce a new slate of tariffs, markets are watching to see what's at stake for major exporters like Taiwan that run trade deficits with the U.S.

U.S. duties on semiconductors could deal a big hit to Taiwan, where the chip industry contributes an estimated 40% of exports and 25% of gross domestic product, ANZ economists say.

If tariffs are imposed only on Taiwan's direct chip exports to the U.S., which accounted for 4.5% of Taiwanese semiconductor exports in 2024, the impact could be limited, ANZ economists Vicky Xiao Zhou and Raymond Yeung said in a research note.

If U.S. tariffs include all products containing Taiwan-made chips, "the impact could be significant," they said.

Questions about overspending on AI infrastructure are also weighing on Taiwan equities, as the emergence of Chinese startup DeepSeek's low-cost model led investors to wonder if new technological developments will erode demand for high-end chips.

DeepSeek's sudden rise in January "exacerbated concerns as to whether adding more computation power is the best way to improve models, and whether AI spending by the likes of Amazon and Microsoft is durable," Morningstar analyst Phelix Lee said in a recent note.

DeepSeek's success has given investors pause, said ING economist Lynn Song. Investors are re-evaluating the belief that the U.S. winning the global AI race is a foregone conclusion and that Taiwan, as the main chip provider, is the biggest beneficiary, he said.

TSMC, the world's largest contract chip maker, accounts for the bulk of the world's advanced semiconductor manufacturing capacity and counts Nvidia and Apple as its biggest clients. Its shares have fallen 15% this year so far after surging 81% in 2024.

Meanwhile, Foxconn Technology, the world's biggest contract electronics maker, tumbled 21% in the first thee months of 2025 after notching a 76% rise last year.

Whether new breakthroughs will change how Taiwanese firms cash in on AI remains to be seen.

Goldman Sachs analysts last week revised down their global AI server volume forecast for 2025-2026 and cut target prices on share of Taiwan AI-server supply chain companies. Among the issues cited were demand-and-supply uncertainties tied to the release of more efficient AI models like DeepSeek's.

Another headwind for Taiwanese equities lies in the continued underperformance of U.S. tech stocks. Taiwan's Taiex has been tracking weakness on the tech-heavy Nasdaq this year as major players experience volatility amid fears of a U.S. recession and policy uncertainty.

Taiwan's tech-driven economy is heavily reliant on demand from the U.S., "especially the 'Magnificent Seven' that have a dominant weight in the U.S. market," said HSBC analysts.