Tech Stocks Face Uncertainty Amid Tariff Changes

In recent weeks, stocks have declined significantly as President Donald Trump announced a tariff plan impacting products from various countries. The technology sector has been among the hardest hit due to its heavy reliance on international supply chains for parts and finished products.

Tariffs applied to these goods entering the U.S. would increase operational costs for tech firms, potentially leading to lower earnings. Investors also express concern that if leading tech companies raise prices on products like smartphones and laptops to offset these costs, customers might choose to hold off on purchases, creating another risk for earnings.

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This turmoil pushed the tech-heavy Nasdaq Composite into a bear market, affecting major players like artificial intelligence (AI) chip leader Nvidia (NASDAQ: NVDA) and cloud giant Alphabet. Notably, the so-called “Magnificent Seven,” a group of tech stocks that fueled market growth over the past two years, have been at the forefront of this decline.

On Friday, however, some relief came when the president exempted certain electronics, including smartphones and chips, from the tariffs. This decision sparked optimism among tech companies, investors, and potential buyers alike. Yet, by Sunday, Trump indicated that this exemption might not be permanent, and additional tariffs specifically targeting tech products seemed likely.

Given this context, the critical question remains: are tech stocks still vulnerable, or is the worst behind them?

Image source: Getty Images.

Manufacturing Beyond U.S. Borders

Earlier this month, Trump set varying tariff levels on international goods before suspending them for 90 days to facilitate negotiations with trade partners. In response to tariffs from China, the U.S. has raised its tariff on imports from that country to 145%.

The ongoing uncertainty looms particularly large for tech companies, which depend heavily on international manufacturing capabilities. Countries like China provide vital production capacity and expertise that are not readily available in the U.S. For instance, Apple (NASDAQ: AAPL) primarily manufactures its iPhones in China, although it has started increasing production in India and Vietnam. Bloomberg Intelligence previously estimated that even moving just 10% of Apple’s production capacity from China could take up to eight years.

Similarly, Nvidia relies on Taiwan Semiconductor Manufacturing, which has invested $65 billion in building advanced manufacturing facilities in Arizona. Despite producing some components there, most Nvidia chips continue to be manufactured in Taiwan, and the Arizona facility lacks the capacity to handle the packaging process for Nvidia’s new Blackwell chip.

Market Sentiment and Uncertainty

For many technology firms, the landscape remains challenging. While the news of tariff exemptions offers hope, it’s essential to consider that Trump’s decisions can shift quickly. The recent indications that tech products may still face tariffs have dampened some investor enthusiasm. It’s crucial to highlight that tariffs are paid by the importer of goods, which adds another layer of complexity for tech companies.

Are tariffs a lingering threat for tech firms? A permanent exemption could have eased many concerns, but the current temporary reprieve suggests that the government is receptive to the issues raised by tech companies. Trump’s social media post from Sunday, indicating his administration is reviewing the supply chain for electronics, hints at potential alleviation of tariffs to manageable levels.

Are Tech Stocks on the Rebound?

While tech firms are not entirely free from challenges, their current position is far more favorable than it was several weeks ago. The government appears to recognize that the initial tariff levels would have posed significant difficulties for companies.

What implications does this hold for investors? As always, maintaining a long-term perspective is paramount. From this angle, today’s industry leaders, including Nvidia and parts of the Magnificent Seven, show promise as potential buys. Even though these stocks currently trade at discounted levels due to recent downturns, their long-term prospects remain strong. If you’re prepared for short-term volatility, now may be an opportune time to invest in these undervalued stocks.

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Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. Adria Cimino holds no position in any stocks mentioned. The Motley Fool has vested interests in and recommends Alphabet, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.