Stocks have tumbled in recent weeks as President Donald Trump set out a tariff plan on products from countries around the world, and the biggest decliners have been in the tech sector. That's partly because these players rely heavily on other countries for the production of parts and finished products.
A tax on these goods as they cross the U.S. border would weigh heavily on tech companies' costs, translating into pressure on earnings. And investors also worry that if tech giants lift the prices of items such as smartphones or laptops to compensate, people may hesitate to buy. That represents another threat to earnings.
All of this pushed the tech-heavy Nasdaq Composite into a bear market and left many market giants like artificial intelligence (AI) chip leader Nvidia (NVDA 0.35%) and internet search and cloud powerhouse Alphabet at bargain valuations. In fact, the "Magnificent Seven," a group of tech companies that led market gains over the past two years, recently led indexes' declines.
On Friday, though, these companies got some good news: The president offered smartphones, chips, and other electronics products an exemption from the tariffs -- an enormous relief for tech companies, investors, and potential buyers of tech products. But, by Sunday, Trump and other officials suggested the exemption wouldn't be permanent, and new tariffs specifically for tech products are on the way.
Considering all of this, are tech stocks still facing a big risk? Or are they finally out of the woods?
Image source: Getty Images.
Made not in the USA
Trump earlier this month set various tariff levels for countries worldwide, then halted them for 90 days to allow time for negotiations with these trading partners. Meanwhile, in response to retaliatory tariffs from China, the U.S. increased its tariff on imports from that country to 145%.
A big cloud remained over tech players due to the fact that their cost structure depends on manufacturing abroad, and certain countries offer them capacity and expertise they can't find in the U.S. China is a key country of production for many U.S. tech companies.
Today, Apple (AAPL +0.88%), for example, produces its iPhone primarily in China, though it has expanded production of this and its other products into countries including India and Vietnam. It would take eight years to shift 10% of Apple's production capacity out of China, Bloomberg Intelligence estimated back in 2022.
NASDAQ: AAPL
Key Data Points
Nvidia is another example. Taiwan Semiconductor Manufacturing, producer of Nvidia chips, has already invested $65 billion in an advanced manufacturing facility in Arizona and just recently pledged to invest an additional $100 billion in its U.S. presence. The facility has been producing at high volume since late last year and does some work for Nvidia there. But most Nvidia chips still are made in Taiwan. The Arizona facility doesn't have the capacity to complete the packaging process for Nvidia's new Blackwell chip.
Trump's words temper enthusiasm
And the situation is similar for most other technology companies that produce electronics. So, clearly, news of an exemption looks like a game changer for the entire industry. But Trump could change his mind, and the latest suggestion that these companies still will face tariffs on imports in the near future may temper investor enthusiasm. It's important to remember that though Trump places a tariff on a country, the importer of the goods from that country actually pays the duty.
So, do tariffs still represent a risk for tech players? Though a permanent exemption would have been the best-case scenario, I'm still somewhat optimistic about what may happen next. The government has listened to concerns of tech companies -- as it has announced at least a temporary exemption -- and Trump wrote in a social media post Sunday afternoon that his team is "taking a look" at the electronics supply chain.
So, it's possible tariffs concerning electronics may be set at a manageable level. Of course, it's too early to predict anything, but I think it's unlikely the government would let the U.S. tech industry crumble, or that tech players wouldn't do all they can to get tariffs set at a level they can live with.
Out of the woods?
Though tech players aren't completely out of the woods, they're in a much better position today than they were a few weeks ago. And it appears the government has understood that the level of tariffs initially imposed would have been difficult for companies to manage.
What does this mean for investors? As always, it's important to take a long-term view on stocks, and from this perspective, today's leaders such as Nvidia and certain other Magnificent Seven players look like buys. They're trading at bargain levels amid recent declines, yet their prospects years from now remain bright. That's why, if you don't mind some volatility in the near term, it's a great idea to scoop up these beaten-down stocks now.
