President Donald Trump escalated the United States’ trade war tit-for-tat with China again this week when he threatened to tax the total value of the goods China exports to the U.S. — an amount that totaled more than $500 billion in 2017.
This increase in rhetorical intensity has put Wall Street on edge, but, while all stocks could indirectly be impacted by a tariff-induced slowdown in economic growth, those companies with greater revenue exposure to China are especially at risk.
Technology stocks have outsized revenue exposure to China. For example, five large tech firms derive 50% or more of their revenue from China (as of 2017):
- Skyworks Solutions (NASDAQ:SWKS) — 80% of revenue
- Qualcomm (NASDAQ:QCOM) — 63% of revenue
- Qorvo (NASDAQ:QRVO) — 60% of revenue
- Broadcom (NASDAQ:AVGO) — 52% of revenue
- Micron Technology (NASDAQ:MU) — 50% of revenue
Interestingly, with the strong performance of the technology sector during the past month, most of these stocks have been able to avoid much of the selling pressure that a continued trade war with China could bring.
Multinational Industrial Stocks
Industrial stocks with multinational operations and broad exposure to China also stand to suffer.
Boeing (NYSE:BA) and Caterpillar (NYSE:CAT) are in the unenviable position of potentially getting hit from both sides in the trade war. The United States’ tariffs on steel an aluminum hit the margins of these companies by raising the price of the raw materials they use to build their airplanes and bulldozers, and any retaliation from China that would limit these companies’ ability to sell their products in China would hit their top-line revenue. BA generated 13% of its overall revenue from China during 2017, while CAT generated 21.5% of its revenue in China during the same period.
Consumer Goods Stocks
Spending by the growing middle class in China accounted for 15% of NKE’s revenue during 2017, and GM sold more than four million vehicles in China last year.
If companies like these lose access to Chinese consumers, their stock values could take a significant hit, as traders would be forced to reevaluate their expectations for both revenue and earnings growth.
The Bottom Line
The more heated the trade-war rhetoric becomes and the more policies that actually get enacted, the more bearish traders on Wall Street are likely to become on the entire U.S. stock market.
However, it will be important to watch those stocks with acute exposure to Chinese revenue most closely as they are likely to fall harder and faster if tensions escalate.
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