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

The decline of the S&P 500 Index (SPX) has steepened in the aftermath of President Trump's threats to further increase tariffs on imports from China. If the trade war with China does indeed intensify, stocks in the industrial and technology sectors appear to be at particular risk going forward, according to a report in Barron's.

The table below lists the largest technology and industrial sector ETFs by assets, and their year-to-date gains through May 6, which have far outstripped the broader market. The S&P 500 index was up by 17.0% over this period.

2 Sectors That Could Get Dragged Down By Trade War

  • Technology Select Sector SPDR Fund (XLK): +26.6% YTD
  • XLK total assets: $21.1 billion; biggest 3 holdings listed below
  • Microsoft Corp. (MSFT), Apple Inc. (AAPL), Visa Inc. (V)
  • Industrial Select Sector SPDR Fund (XLI): +21.3% YTD
  • XLI total assets: $10.4 billion; biggest 3 holdings listed below
  • Boeing Co. (BA), Union Pacific Corp. (UNP), Honeywell Int'l Inc. (HON)

Source: eftdb.com

Significance For Investors

Technology and industrial companies based in the U.S. are especially dependent on global supply chains in which China is a key supplier of components and finished goods alike. Higher tariffs on imports from China would raise their costs. Additionally, U.S. companies in both sectors also count China as a key market for their goods and services. Higher U.S. tariffs on Chinese goods may diminish Chinese demand for U.S.-made goods in two ways: by spurring China to implement retaliatory tariffs or trade restrictions, or by inducing an economic slowdown in China.

U.S.-based industrial companies, on average, derive about 33% of their sales overseas, per the Journal, a huge foreign exposure. Those with particularly high exposure to the Chinese market include aircraft manufacturer Boeing, construction equipment maker Caterpillar Inc. (CAT), and farm equipment maker Deere & Co. (DE). As of mid-morning trading on May 7, these stocks were staging sharp pullbacks.

Among tech companies, device maker Apple is in a particularly precarious position, having outsourced much of its manufacturing capabilities to Chinese firms, as well as counting China as a significant source of sales. Apple shares retreated by 3.2% since the Friday close through mid-morning Tuesday. Meanwhile, a majority of the world's supply of semiconductors is manufactured in China, per Barron's. Increased tariffs would raise costs for a broad spectrum of U.S.-based companies, given the increasingly pervasive use of computer chips in an ever-growing number of products, ranging from appliances to automobiles.

Additionally, while the chips manufactured in China tend to be lower-end commodity products, the needs of Chinese industry for more advanced semiconductors is filled largely by imports. Six leading U.S. chipmakers derive anywhere from 24% to 65% of their sales from China, per an earlier report in The Wall Street Journal: Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO), Broadcom Inc. (AVGO), Micron Technology Inc. (MU), Texas Instruments Inc. (TXN), and Intel Corp. (INTC). The PHLX Semiconductor Stock Index (SOX) was down by 3.4% from its Friday close, as of mid-morning Tuesday.

Looking Ahead

After rebounding partially from its lows on Monday, the S&P 500 slid again on Tuesday through noon, suggesting that worries among investors are escalating. Meanwhile, U.S. trade representative Robert Lighthizer says that Trump's announcement came after China reneged on certain unspecified promises, per the BBC. He insisted that a deal was still possible, and that talks would resume in Washington on Thursday.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.