Vulnerabilities by sector and industry
The impact of tariffs is likely to vary across sector groups and even more so within specific industries. This section focuses on the sectors that are likely to be most and least impacted by the ensuing tariff shock:
Technology:
Tech-oriented firms are the most exposed to international supply chain impacts and international demand-related disruptions. Over 70% of the cost of goods sold in this sector—particularly within semiconductor, capital equipment, and large-cap communication services—is sourced abroad. Moreover, the sector also has about 60% of its revenue sourced abroad.
The ongoing national security investigation by the Trump administration into the semiconductor supply chain, including manufacturing equipment and downstream products that contain semiconductors, adds significant risk. Indeed, beyond trade policy, the technology sector is likely to face elevated risks, given broader concerns about its role in national security through the exporting of critical technology. The outcome could see most global semiconductor capital equipment companies facing some degree of export restrictions to service Chinese demand.
Yet, while the outlook for tech, in general, has faced increased challenges, even those bearing the brunt of the impact—semiconductor and other tech hardware firms—have only seen minor impacts from the tariffs so far, according to their Q1 earnings reports. Helping cushion the blow has been the focus on supply chain resilience since the pandemic. Many of these firms have already reduced their dependence on China, made their supply chains more agile and flexible, and developed the ability to quickly change their sourcing. Many have also begun segmenting manufacturing to bring it closer to their end customers.
Not all tech is equally as vulnerable to trade tariffs. The software sector has a lower risk, given its smaller exposure to international supply chains and revenue, and as well as minimal direct exposure to China. This is evidenced by hyperscaler capex spending, which remains robust, suggesting there is no sign yet of uncertainty weighing on spending plans. Internet companies are also likely to be unaffected. Together with software, both are likely viewed as tech-sector safe havens given the durability of fundamentals, reasonable valuations, and minimal tariff risk.
Amid a temporary reprieve in trade hostilities and structural reasons for optimism within the space, markets have been quick to rebound, with the tech sector retracing all its losses since “liberation day.” Ultimately, however, overall sector risks remain prominent, especially given the fluid nature of trade policy, and so investors should remain vigilant of further volatility.
Materials:
This sector faces significant supply chain vulnerabilities due to the limited domestic production capacity of steel and aluminum, and because rebuilding that capacity—such as constructing new foundries—takes several years and cannot be accomplished overnight.
Risks appear to be concentrated in larger firms, with large-cap stocks sourcing nearly 80% of their production costs abroad, compared to only 40% for mid-caps. There is a size bias at play, however, as most domestically oriented firms have fallen out of large-cap status in recent years, and those remaining are primarily larger international firms.
With about 40% of the sector’s revenues sourced abroad, Materials is also particularly sensitive to global economic growth. While tail risks have eased, especially given the temporary China trade truce, global demand for commodities is likely to slow this year. The policy-induced resetting of the global trade system is bringing rise to uncertainty as countries try to navigate this new and uncomfortable equilibrium. This is likely to weigh on global economic growth and create headwinds for the sector.
Healthcare:
In aggregate, this sector benefits from inelastic and domestically-oriented demand. As a result, it is among the least at risk from trade policy-related revenue and supply chain disruptions, albeit with some exceptions.
In particular, tariffs still present a potential material headwind to goods-oriented industries within the space. While many have preemptively built up excess inventory ahead of the tariffs, MedTech and Life Science Tools companies, with their notable exposure to international supply chains, could be confronting an EPS headwind of around 5-10% because of the trade war.
The pharmaceutical industry also faces distinct risks, as it too is under an ongoing national security investigation, the outcome of which is highly uncertain but could potentially lead to additional tariffs or trade barriers. These trade-related risks are skewed toward large-cap pharmaceutical companies, which have nearly 70% of their supply chain costs sourced abroad. However, mid-cap companies may also be similarly, albeit indirectly, at risk. While almost 90% of mid-cap pharma production is sourced in the U.S., plenty of input materials are imported from Ireland and Switzerland. Key starting materials and active ingredients, primarily for generics, are also sourced from China and India.
Further complicating matters, as many pharma companies utilize complex transfer pricing that inflates the price of imported drugs at the border to minimize their U.S. tax burden, this unique accounting treatment would work to amplify the effects of potential tariffs.
Utilities:
These companies appear uniquely insulated to weather the uncertainty and disruption triggered by trade policy. From a supply chain perspective, most have prioritized domestic manufacturing in recent years. This is particularly true for the clean energy supply chain, as the Inflation Reduction Act and earlier trade restrictions on Chinese solar panels have incentivized domestic investments. Utility companies operate within a highly regulated business model, which limits exposure to foreign revenue exposure, and suggests that Utilities would generally be able to pass through most associated tariff cost increases to customers.
Financials:
Counterintuitively, despite the trade policy-induced volatility that has ensnared markets, the financial sector is also likely to be well insulated. Investment banks with high exposure to capital markets are likely to benefit the most from elevated trading volumes. Provided defaults and delinquencies remain manageable, very domestic regional banks are also poised to benefit.
Other defensive sectors:
Companies in sectors whose revenues are more domestically oriented are likely also to remain well insulated. This is likely to ring true for Consumer Staples, who stand to benefit given very inelastic demand from end-consumers. As tariffs push input prices higher, however, production and supply chain efficiencies will likely come into focus within the space, with lower-cost producers with domestically oriented production lines likely to benefit the most. Real Estate is also generally less directly exposed to tariffs, given its domestically oriented demand, but it has some vulnerabilities via higher material costs.
