What happened

Shares of iPhone component suppliers Taiwan Semiconductor Manufacturing (TSM -4.86%), Qualcomm (QCOM -1.75%), and Skyworks Solutions (SWKS -0.86%) were falling more than the market Friday, down by 2.5%, 1.2%, and 0.9%, respectively, as of 10:43 a.m. ET.

There wasn't much company-specific news out regarding them, but each may be feeling the impacts of a combination of negative effects. The overall Nasdaq Composite index was down as yields on long-term Treasury bonds rose, perhaps reflecting the better-than-expected numbers from the Chicago Purchasing Managers' Index (PMI) report that was delivered Friday morning. Also, earlier this week, concerns arose over China's abrupt reopening and the resulting surges in COVID-19 cases there. Late Wednesday, a leading research firm lowered its outlook for near-term iPhone shipments due to the expected supply issues.

So what

Technology stocks have had a pretty tight negative correlation with long-term interest rates in 2022, and on Friday morning, the 10-year Treasury Bond yield rose again by more than 6 basis points to over 3.9% at one point. While it's still below the 2022 high of 4.33%, the 10-year yield is well above its early December trough of just under 3.5%.

Long-term yields might have gotten a boost because the Chicago PMI, which reflects the health of the manufacturing sector in the Chicago Fed region, came in stronger than expected. The 44.9 reading for December was much better than the 40 that was forecast, and up from 37.2 in November. Although any reading below 50 indicates a contraction, the actual result suggests that economic conditions are a bit better than the experts had feared. Since investors are in a "bad news is good news and good news is bad news" mindset as the Fed works to cool inflation, yields rose on the news, and growth stocks generally declined.

Even though Taiwan Semi, Qualcomm, and Skyworks don't trade at high valuations, they are generally correlated with the high-growth tech sector. Furthermore, if the Federal Reserve continues to hike interest rates in the face of this "strong" economic reading, investors may fear that it could push the economy into recession.

These key Apple (AAPL -0.57%) suppliers may also be feeling the heat as iPhone shipment estimates were recently lowered. Earlier this week, research site Trendforce cut its outlook for 2022 iPhone 14 shipments to just 78.1 million units. The reduction doesn't reflect a problem of demand but of supply, as Chinese manufacturer Foxconn has been experiencing COVID-19 outbreaks at its Shenzen plant (where it makes iPhones) since October, which culminated in riots at the plant in November.

In addition, Trendforce notes the Apple supplier is still experiencing a labor shortage, even as the Chinese government has rolled back its restrictive "zero-COVID" policies. As a result of that labor shortage, which could get worse as COVID-19 sweeps across China, Trendforce is predicting a 22% year-over-year decline in iPhone shipments in the first quarter of 2023.

Given that TSMC produces Apple's Bionic iPhone processors, Qualcomm designs the iPhone's modem (and produces it with TSMC) and Skyworks supplies a variety of communications chips for the iPhone (Apple was responsible for 58% of Skyworks' revenue last year), it's no wonder that a potential slowdown in iPhone manufacturing has their stock prices falling.

Now what

Semiconductor stocks were generally crushed in 2022 as the combination of high inflation, high interest rates, and a cooldown from the huge pandemic-driven surge in demand has led to low demand and high inventories. That situation doesn't appear likely resolve in the near term, as the COVID situation in China and the path of the Federal Reserve on interest rate hikes both remain uncertain.

That being said, given their depressed valuations, investors looking for upside at some point in 2023 may want to give these beaten-down chip stocks a look. The market tends to be quite forward-looking with respect to the semiconductor cycle, so as soon as some leading indicators suggest a bottom, these stocks could take off from their current low multiples -- and they could do so well before their earnings follow.

Furthermore, over the long term, competitively advantaged semiconductor stocks should grow faster than the economy. Perhaps that's why the long-term-focused Warren Buffett purchased shares of TSMC this past summer as its share price swooned.