Will Tariffs Doom Chip Stocks and End the Bull Market?

With President Trump back in the White House, we were already anticipating market turbulence due to tariffs. The month of March didn’t disappoint on that front. Not even semiconductors have been spared, with hints that tariffs might be in store for chips made outside of the U.S. Let’s do an update on our video from back in November (link to that here: Will Tariffs Doom Chip Stocks and End the Bull Market?)

We have a lot of research on the topic of tariffs and chips, because we were invested in chip stocks seven years ago when the trade war started. And since we primarily focus on chip stocks here, we will look at the tariff subject primarily through that lens (but it of course applies to other corners of the economy too).

Let’s define a couple of terms before we start:

Trade war: This is in reference to the U.S.-China trade war, or the increasingly tense economic relationship between the U.S. and China that began heating up in late 2017, early in President Trump’s first time in office. 

Tariff: Usually this is in reference to an import tariff, or tax. This tax is placed on a product by a country (in this case, the U.S.) manufactured in another country (for example, a product manufactured in China).

Here is a timeline of the trade war, a new era of protectionist tariffs, that have actually been going on for the last seven years, unbeknownst to most consumers. We are looking at this measured by iShares Semiconductor ETF (SOXX) and Van Eck Semiconductor ETF (SMH).

We zoomed in on the first half of the trade war from 2017 to the end of 2019, when we forgot about trade wars, and instead shifted our focus to COVID-19. Yup, if you don’t know it yet, investing (much like history in general) is all about “going from one damn thing to the next.”

Anyways, as you can see above, in spite of the trade war starting at exactly the wrong time for the semi industry, at the peak of a growth cycle and the start of a downcycle in 2018, chip stocks did just fine. 

But are we headed for a repeat of 2017-18 in 2025-26?

Are chip stocks toast because of tariffs?

The simple answer is: Probably not. 

This of course depends on the timing, magnitude, clarity, etc. of changes the White House is making with its economic policy. However, the last go-around when the trade war started, the semi industry was at a cyclical peak and began a natural cyclical down cycle for sales in 2018 through early 2019.

This time, though, most of the semi industry – excluding accelerated computing and AI infrastructure (Nvidia) – is not at a cyclical peak. Rather, end-market chip sales are coming out of a long downturn. 

And as you may know from our recent earnings coverage for Q3 2024, the next growth cycle for chips continues to get delayed. Current thinking is a more robust growth cycle won’t kick in for most of the industry until later in 2025. 

History won’t be repeated, but current events might rhyme, just a little bit, with 2017-18. 

But shouldn’t we be concerned about tariffs?

Let’s talk about tariffs. They are a concern. Tariffs are a tax, and higher taxes are generally agreed upon by economists to negatively impact consumers.

However, did you know “Trump’s tariffs” have actually been “Biden’s tariffs” too? The last administration left most of Trump’s tariff policies in place, and in fact renewed or expanded some of them earlier in 2024.

https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/14/fact-sheet-president-biden-takes-action-to-protect-american-workers-and-businesses-from-chinas-unfair-trade-practices

The tariffs referenced above are “section 301” tariffs on China which were put in place in 2020 and required a 4 year review. These tariffs were reviewed and were extended early in 2024. 

The primary target of these tariffs, as it pertains to the semi industry, have been on semiconductor wafers manufactured in China. These wafers are mostly geared towards things like industrial power equipment, automotive, and other so-called legacy or mature chip manufacturing processes. 

Bear in mind the tariffs are IN ADDITION to the various export restrictions in place on advanced manufacturing equipment (like ASML‘s EUV litho) and “AI chips.” Note there is an exclusion process for many of these products, found here: https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-china/300-billion-trade-action 

There is a great timeline of events from the taxfoundation.org: https://taxfoundation.org/research/all/federal/trump-tariffs-biden-tariffs/ 

The point you should take away from this is we have been living with these tariffs all along. So the concern is how and when these tariff policies will change, not IF they will become a thing. And the timing and magnitude of new tariffs, if they are implemented, is what has the market in freakout mode right now.

Not all chip companies are created equal

Let’s go back to the start of the trade war in late 2017, which corresponded with a cyclical peak in revenue growth for semiconductors. Here is a look at Micron, one of the most cyclical businesses in the industry (as most memory chipmakers are), and the former bellwether of the industry Intel. The first slide is revenue, and the second is operating income for each from the temporary peak in sales in 2017 to the bottom in early 2019.

If you want to make cool financial charts and models, check out FinChat.io. Here’s a link that gets you 15% off a membership: https://finchat.io/csi/ 

This second slide is where you’ll want to focus your attention in 2025. Not all semi businesses are created equal. Some will outperform in growth as a new cycle begins, but the rebound in profitability will not be evenly distributed.

However, you can see both Intel and Micron took a revenue hit starting in 2018. But ultimately this had more to do with the natural semiconductor industry cycle than it did with the trade war itself – although constant media coverage of the trade war exacerbated the stock prices at that time. The businesses themselves were able to manage. 

It’s much the same story for Applied Materials (AMAT) and ASML, which we could argue are especially well built business models to weather the entirety of the semi industry cycle from peak to bottom to peak. Even the specialist ASML had a couple quarters of beaten up operating profit, but it quickly rallied back to all-time-highs as the next cycle of growth resumed in 2019. 

One last financial chart, the new chip manufacturing industry leader that was still emerging in 2017 and 2018, Taiwan Semiconductor Manufacturing (TSM). Another solid performance. Revenue and profit fell from the top-out in 2017, but very quickly got back to growth in 2019.

The lesson: There’s going to be a lot of noise about economic policy in 2025 and 2026 as the market tries to determine the effects of tariffs. And there will be effects, in our opinion, detrimental to global trade. But investors that hold onto quality, and add on severe dips with an eye towards holding the business for the long-term, should do more than just fine.

So what’s the point of tariffs?

What exactly is the point of tariffs? The real point (in our opinion, we think what is said is different from what is meant in politics) isn’t to raise tax revenue for the government. The U.S. government doesn’t need a few tens of billions of dollars in annual tariff income. (The book Money: The True Story of A Made-Up Thing by Jacob Goldstein is an excellent read, by the way.)

The real point of a tariff is to affect supply chain change, in this case, in the hopes that it will favor the U.S. economy. For the last few years, these tariffs have also been supplemented with the U.S. CHIPS Act to kickstart investment in U.S.-based manufacturing. (The U.S. CHIPS Act funding and grants are in question right now, all the more reason to focus on companies that never needed the aid in the first place.)

By supply chain change, what exactly do we mean?

Here’s one example of the global semi supply chain, the travels of just one type of silicon wafer and the smartphone chips diced from it, based on real world movement of products. These are the steps in these chips’ globetrotting journey. And tariffs are geared towards getting parts of the manufacturing process relocated to a place favorable for the government enacting a tariff – often referred to as “onshoring” or “friendshoring.”

A new tariff on foreign products, let’s say on chip testing and packaging, would be to reshuffle the supply chain to the U.S., or to countries more “friendly” to trade with the US, like in southeast Asia. And this in fact has begun, with some testing, packaging, and assembly facilities getting relocated out of China and to southeast Asia the last few years.

One last time for the sake of clarity as we think about semiconductor manufacturing and trade in the coming years: The question now isn’t WHAT WILL HAPPEN IF TARIFFS ARE IMPOSED; the question is HOW WILL ALREADY EXISTING TARIFF POLICY CHANGE OR EXPAND.

Will other countries besides China get targeted? Will other parts of the supply chain (not just wafers, but packaged chips too) also get hit with a tax? What will happen to corresponding federal funding like the CHIPS Act along with these tariffs? We’ll have to see, but we’ve already had a preview of coming attractions for the last four-plus years.

Two examples of chip company supply chains at risk

The good news is, some companies have already been thinking about these challenges. We illustrated these economic policy problems facing some companies in the supply chain in videos, like this one on Qualcomm (QCOM), Broadcom (AVGO), and one of their customers, networking hardware company Ubiquiti (UI). China A Big Risk For Qualcomm and Broadcom? And 1 Under-Followed Stock You Need to Know About

Here are potential challenges facing Qualcomm and its chip packaging contractors located in China. Will these get targeted by tariffs? Or will exceptions be made? After all, the silicon wafers and chips themselves might be made OUTSIDE of China. So if they’re simply assembled and tested in China (typically a low-value commoditized service), is it really a “Chinese product”? Again, time will tell, but we believe many of these chip stocks are already reflecting at least some of these risks.

And much the same story for another company, power chip design Monolithic Power Systems (MPWR), which we’ve had lots of discussion about over on Discord. The “Nvidia supply risk” is overstated. The real risk, in our assessment, is how MPS might get affected by tariff actions in the next few years. Big media doing its typical job of distracting YOU THE INVESTOR from the bigger picture you actually need to know. Remember to join us on Discord for more actually relevant details on topics like this.

Time for chip stock investors to panic over tariffs?

And so let’s zoom out once more. Are tariffs and the next round of the trade war going to be game over for the chip industry? No. But if you haven’t been already, it’s going to behoove you to double down on quality, on the best of the best, if you want long-term gains like these ones displayed here.

A basket of quality semiconductor businesses and adjacent supply chain companies will serve you well, either via an ETF like SOXX, SMH, or even something a bit more broad like Vanguard Information Technology ETF (VGT). 

But the point we want to stick to is that quality businesses always figure out a way to thrive, regardless of economic climate and shifting policy. Chip stocks have faced these challenges before, and have continued to be great market-beating investments. It’s important for us as investors to be educated, so that we can strap in and feel comfortable riding out the turbulence with the businesses we own.