Following President Trump’s warnings to raise tariffs on imports from China further, the drop of the S&P 500 Index (SPX) has become worse. Stocks in the industrial and technology sectors seem to be most vulnerable moving ahead, according to a Barron’s analysis, if the trade war with China does really escalate.
The biggest technology and industrial sector ETFs by assets are shown here, along with their year-to-date gains as of May 6, which have significantly outpaced the general market. The S&P 500 index increased by 17.0% over this time.
2 Sectors That Could Get Dragged Down By Trade War
- YTD gain of 26.6% for Technology Select Sector SPDR Fund (XLK)
- Total assets of XLK are $21.1 billion; the top 3 holdings are mentioned below.
- Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Visa Inc. (V)
- +21.3% YTD for Industrial Select Sector SPDR Fund (XLI)
- Total assets of XLI are $10.4 billion; the top 3 holdings are mentioned below.
- Union Pacific Corp. (UNP), Honeywell International Inc., and Boeing Co. (HON)
Significance For Investors
American-based technology and industrial firms are particularly reliant on international supply chains where China is a major provider of both components and completed items. Costs would increase for Chinese imports if there were higher taxes. In addition, Chinese businesses in these industries see China as a significant market for their products and services. Higher U.S. tariffs on Chinese goods might reduce Chinese demand for American products in two ways: either by causing an economic slowdown in China or by encouraging China to impose retaliatory tariffs or trade restrictions.
According to the Journal, industrial enterprises with U.S. headquarters typically generate 33% of their revenues outside of the country. Boeing, Caterpillar Inc. (CAT), Deere & Co., and other companies with significant exposure to the Chinese market include those that produce airplanes and agricultural equipment (DE).On May 7, trade was in the middle of a strong drop for these equities.
Device manufacturer Apple is in a particularly perilous position among IT businesses since it outsources a large portion of its production to Chinese companies and relies heavily on China for sales. Since Friday’s closing till Tuesday morning, Apple share prices had fallen 3.2%. Meanwhile, according to Barron’s, China produces the vast bulk of the world’s supply of semiconductors. Given the increasingly widespread usage of computer chips in an expanding range of items, from appliances to autos, higher tariffs would result in higher prices for a wide range of American businesses.
Furthermore, although Chinese-made chips often fall into the lower-end commodity category, imports generally satisfy the Chinese industry’s need for more sophisticated semiconductors. According to a previous article in The Wall Street Journal, six major American chipmakers—Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO), Broadcom Inc. (AVGO), Micron Technology Inc. (MU), Texas Instruments Inc. (TXN), and Intel Corp.—get anywhere between 24% and 65% of their revenues from China (INTC).As of Tuesday morning, the PHLX Semiconductor Stock Index (SOX) was down 3.4% from its closing on Friday.
The S&P 500 fell again on Tuesday until midday after somewhat recovering from its lows on Monday, showing that investor concerns are growing. Robert Lighthizer, the U.S. trade negotiator, told the BBC that Trump’s declaration came after China broke several unnamed pledges. He emphasized that negotiations will get back up in Washington on Thursday and that a solution was still still conceivable.
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