Investing.com -- Semiconductor stocks could face up to 20% more downside if new U.S. tariffs spark a broader economic slowdown, Citi said, warning that prolonged trade tensions risk freezing the global chip supply chain.
"We believe the biggest risk to the semi sector is a recession resulting from tariffs," Citi analysts wrote.
“If the tariffs continue for another month, we believe is it highly likely the supply chain will “freeze up” given uncertainty, drastically lower order rates/inventory, and result in lower guidance across the board – similar to Covid.”
Citi estimates that the SOX Index, which tracks the U.S. semiconductor sector, could see a further 10% cut to earnings estimates and a 10% reduction in valuation multiples.
That would come on top of the sector’s recent pullback, with the SOX trading at 20x forward earnings, just 4% above the S&P 500 and below its historical premium of 8%.
The Trump administration’s latest tariff package includes steep levies on imports from Taiwan (32%), South Korea (25%), China (34%), and Vietnam (46%), as well as a 10% tariff on all imports broadly.
Citi called the tariff regime “convoluted and hard to accurately assess” due to the complexity of the global semiconductor supply chain.
While direct chip imports may avoid tariffs, JP Morgan said the broader risk is to end-demand, as higher prices for electronics and autos that use chips could lead to “demand destruction.”
"Even with potential Section 232 investigations and eventual tariffs, very little semiconductors are shipped directly to the US,” JP Morgan analysts wrote.
“The real impact is expected to arise from increased prices of end products that incorporate semiconductors.”
JP Morgan also drew parallels to the 2018 U.S.-China trade war, when chip stocks fell 30–35% from peak to trough amid earnings cuts and falling demand.
We see the potential for further ~10% downside, range of 5–15%, over the next six months, the analysts said.
Citi flagged ON Semiconductor (NASDAQ:ON), Micron (NASDAQ:MU), and GlobalFoundries (NASDAQ:GFS) as most at risk due to lower margins, and Broadcom (NASDAQ:AVGO) for its high valuation multiple. In contrast, higher-margin analog names like Analog Devices (NASDAQ:ADI) and Texas Instruments (NASDAQ:TXN) could hold up better in a downturn.
Despite the bearish near-term view, both firms noted that any recession-induced selloff could set the stage for a rebound, as seen during the pandemic.
“Just like Covid, there will be a sharp rebound once the supply chain/tariffs become more stable and predictable,” Citi said.
