2 S&P Sectors At Biggest Risk In U.S.-China Trade War

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2 S&P Sectors At Biggest Risk In U.S.-China Trade War

The S&P 500 Index (SPX) has fallen further as a result of President Trump’s promises to raise taxes on Chinese goods. If the trade war with China escalates, equities in the industrial and technology sectors look to be most vulnerable moving ahead, according to a Barron’s study.

The table below shows the assets of the major technology and industrial sector ETFs, as well as their year-to-date gains through May 6, which have greatly outpaced the overall market. During this time, the S&P 500 index increased by 17.0%.

2 Sectors That Could Get Dragged Down By Trade War

  • YTD performance of the Technology Select Sector SPDR Fund (XLK) is +26.6%.
  • Total assets of XLK: $21.1 billion; the top three holdings are given below.
  • Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Visa Inc. (V)
  • YTD performance of the Industrial Select Sector SPDR Fund (XLI) is +21.3%.
  • Total assets of XLI: $10.4 billion; the top three holdings are mentioned below.
  • Boeing Company (BA), Union Pacific Corporation (UNP), and Honeywell International Inc. (HON)

Source: eftdb.com

Significance For Investors

Technology and industrial firms located in the United States are highly reliant on global supply chains, with China serving as a vital source of both components and completed items. Higher levies on Chinese goods would enhance their costs. Furthermore, US corporations in these industries see China as a significant market for their products and services. Higher US tariffs on Chinese products may reduce Chinese demand for US-made goods in two ways: by provoking retaliatory tariffs or trade restrictions in China, or by causing an economic slowdown in China.

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According to the Journal, US-based industrial enterprises generate around 33% of their revenues internationally, indicating a significant global exposure. Aircraft producer Boeing, construction equipment maker Caterpillar Inc. (CAT), and agricultural equipment maker Deere & Co. are among those with significant exposure to the Chinese market (DE).As of mid-morning trading on May 7, these equities were experiencing significant declines.

Apple is in a particularly perilous position among IT businesses, having outsourced most of its manufacturing skills to Chinese enterprises while still counting China as a big source of revenue. Apple shares fell 3.2% from Friday’s closing through mid-morning Tuesday. Meanwhile, according to Barron’s, China manufactures the vast bulk of the world’s supply of semiconductors. Increased tariffs would boost prices for a wide range of US-based businesses, given the increasingly widespread usage of computer chips in a wide range of items ranging from appliances to vehicles.

Furthermore, although Chinese chips tend to be lower-end commodity items, the Chinese industry’s requirement for more sophisticated semiconductors is generally met by imports. According to a previous story in The Wall Street Journal, six prominent US chipmakers get anywhere from 24% to 65% of their revenues from China: Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO), Broadcom Inc. (AVGO), Micron Technology Inc. (MU), Texas Instruments Inc. (TXN), and Intel Corp. (INTC).As of mid-morning Tuesday, the PHLX Semiconductor Stock Index (SOX) was down 3.4% from its Friday close.

Looking Ahead

After largely recovering from Monday’s lows, the S&P 500 fell again until midday on Tuesday, indicating that investor concerns are growing. Meanwhile, according to the BBC, US Trade Representative Robert Lighthizer said Trump’s declaration occurred after China broke some undisclosed pledges. He emphasized that a deal was still feasible and that discussions will restart on Thursday in Washington.

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