Tech stocks and tariffs: 5 key considerations for investors

We’ve seen a rolling sell off in technology stocks since the DeepSeek announcement earlier this year, which saw a reassessment of AI capex spending and a renewed interest in Chinese AI-related names. More recently, Trump’s ‘Liberation Day’ announcement of higher-than-expected tariffs imposed on all countries, is leading to a broader sell off across all sectors, particularly cyclical areas, including semiconductors and hardware, two areas that are actually exempt or can navigate the direct impact of tariffs, but are exposed to the second order impact of demand destruction and a possible economic slowdown. Despite the bearishness, we think investors should be reminded that the tech sector remains well positioned versus other sectors, benefiting from multiple secular growth drivers, as well as very healthy balance sheets and strong cash flow generation.

A correction in tech can be healthy

We also take the view that short-term corrections can benefit the sector given certain areas can be prone to overexuberance. That said, looking across the sector as a whole, we would also argue that other areas appear undervalued in both relative and absolute terms if we factor in the growth potential of the secular themes that are driving these stocks. As an example, Amazon still trades at a significant discount to Walmart, despite having significantly higher margins and higher growth prospects.

For tech investors, we believe there are 5 key considerations that are worth bearing in mind amid the current market turmoil:

1. Direct impact of tariffs on technology is low

Overall, President Trump’s tariff announcements have less of an immediate impact on the tech sector, particularly as semiconductors are carved out from tariffs, as well as software, which comes under services (only hard goods are imposed tariffs). On the ground, we have been speaking to companies to hear how they are managing the situation, what are they hearing from clients, and the current impact on their businesses. For example, we just had a call with Jabil, one of the world’s largest contract manufacturing companies, with clients like Apple, Amazon and Tesla. Jabil pointed out that manufacturing out of Mexico is still exempt under the United States–Mexico–Canada Agreement. Given the vast cost differential of manufacturing in Mexico (US$6 vs US$33) in the US currently, companies appear to be willing to absorb the higher costs of manufacturing in Mexico despite the tariffs. This we found quite surprising, reflecting the resilience of some of these supply chains and their clients.

2. Tariff inflation will have a direct impact on tech

From our perspective, the direct implications on the sector will be from the inflationary effect of tariffs, as well as slower economic growth on the back of weaker consumer and business confidence as purchase decisions are reconsidered. We continue to monitor financial stress in the system, and maintain our strong focus on valuation discipline.

But even in a slower growth environment, we view tech as the science of solving problems, with many areas of economic resilience. Cybersecurity would be a key example, while a ramp up in defence spending will drive demand for software, semiconductors, as well as connectors. Moreover, economic slowdowns historically have also proven to be catalysts for new technology adoption to boost efficiency and productivity.

3. Event risk vs economic risk?

In order to better assess the impact of the tariffs we need to determine if this is going to be a shorter-term event risk if negotiations and concessions do materialise in the coming weeks, or if Trump remains steadfast it could turn into a broader, long-tailed economic risk. During the pandemic, there was a very sharp correction in earnings expectations in 2020, with lower earnings revisions happening quickly. Then as tech became central to how businesses operated and consumer preferences changed during COVID, we saw a very strong rebound in earnings.

We have yet to see a significant correction in earnings, but it’s something we are watching closely. Thus far this year there has been a circa 14% pullback in tech earnings revisions. We would view any further major downward reset of earnings expectations during the next few months of earnings season and tariff negotiations in a positive light, should it move close to historical troughs of negative revisions, and sets a lower bar for future earnings that are beatable from the second half onwards. This is a similar dynamic to what happened in the first half of 2020.

4. Resilience – tech and AI are now national priorities

Tariffs are not going to stop the EU, China or other countries back away from plans to create sovereign AI data factories. AI has been on the front line of geopolitics for many years now, and as such the incremental impact from tariffs is likely to be minimal given supply chains have already been reordered to reflect the new geopolitical realignment and US export restrictions. In fact, the focus on building out local supply chains is going to intensify and broaden out with the tariff war. The huge amount of capex announced will need to materialise into providing the equipment and infrastructure to deliver this realignment. This provides a long-term tailwind for growth given this process will takes years, and not months.

5. Historically, tech tends to outperform most of the time at the start of economic upturns

In upturns, tech has usually led other sectors, and notably so when we emerge from a downturn, being a beneficiary of increased business and consumer spending. This emphases the benefit of maintaining exposure to the sector. That said, we do recognise that the risk of an economic slowdown has definitely increased, so investors may want to reconsider their allocation to less liquid and highly cyclical names, as well as focus on those that are more likely to continue to be the leaders as we enter and exit a period of heightened uncertainty. Fundamental, bottom-up analysis and active management will be key to navigating near-term risks as well as positioning portfolios for a future inflection.

Is now a buying opportunity?

Many investors are asking, is this now an entry point for tech? A definitive answer relies on two factors. Clarity on a de-escalation of tariffs via deals, or a delay as well as a reset of expectations to reflect weaker economic conditions in the near term. We expect over the next few months we could see one or both, which would provide a more optimistic outlook for the sector and markets more broadly as we head into the second half of the year. Valuations have also reset, and while it is true that averages remain higher than history, one must understand the maths behind that, as well as the bifurcation of the market with certain names in the Magnificent 7, or certain pockets of technology more broadly distorting these averages. Many areas of technology have now de-rated to attractive levels creating opportunities for longer-term investors, especially so given our ongoing belief that the next major technology wave of AI remains in its early innings.

As fundamental, bottom-up investors we aim to identify the technology leaders of tomorrow who we believe can demonstrate underappreciated earnings growth in years to come,  and continue to navigate market volatility, seeking to take advantage of market dislocations.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.