Trade Wars and the 'Magnificent' Bear: The Impact on U.S. Tech Stocks

The global markets are in turmoil, and the 'Magnificent Seven' megacap U.S. tech stocks are at the epicenter of the storm. President Trump's tariffs have sparked fears of a trade war, recession, and a significant increase in consumer costs, with the potential for a $2,300 iPhone. The once-heralded 'Mag 7'—comprising the likes of Apple, Microsoft, and Amazon—have seen their valuations plummet, with Thursday marking the biggest one-day losses for U.S. equity indexes since the pandemic shocks of 2020. Popular funds tracking these tech giants tumbled 7% on the day, clocking a 25% drop from December's record highs and pushing the group into a technical bear market for the first time since it emerged two years ago.

The impact of these tariffs is not limited to the U.S. markets. Japanese banks, for instance, have been hit hard by the market turmoil, with a sector index in Tokyo staging its biggest one-day fall since last August. French President Emmanuel Macron has called for European companies to suspend planned investment in the U.S., further complicating the situation for U.S. tech stocks. The European Union sees Big Tech as a legitimate target in likely tariff retaliation, as the U.S. runs a trade surplus in services and digital-related trade with the region.

The market's reaction to these developments has been swift and severe. JPMorgan Chase analysts raised the estimate of recession chances to 60% from 40%, reflecting the growing concerns about the economic outlook. The 10-year U.S. Treasury yield has fallen to seven-month lows below 3.9%, as investors seek safety in fixed income. The Federal Reserve, which has held the federal funds rate steady at both of its meetings this year, may cut rates sooner than expected if the economy weakens. Fed Chair Jerome Powell's remarks on the economic outlook will be closely watched for any new thoughts on how trade wars might affect the path of growth and rates.



In this volatile environment, investors are looking for ways to mitigate the risks associated with the trade war. One approach is to diversify their portfolios by investing in international stocks, which have shown outperformance compared to U.S. stocks this year. Liz Ann Sonders, Schwab Chief Investment Strategist, noted that "U.S. stocks had lost ground to international stocks this year, a trend that could gain steam." This diversification can help reduce the impact of tariffs and trade wars on a portfolio.

Another strategy is to focus on sectors that are less affected by tariffs. For example, the health care sector saw the most jobs added in the March nonfarm payrolls report, indicating that it may be more resilient to trade disruptions. Additionally, investors can monitor the actions of the Federal Reserve, which may cut rates sooner than expected if the economy weakens. Fed Chair Jerome Powell's remarks on the economic outlook will be closely watched for any new thoughts on how trade wars might affect the path of growth and rates.

Investors can also consider the potential for a U.S. recession, which JPMorgan has raised to a 60% chance this year. In such a scenario, safe-haven assets like Treasury bonds may become more attractive. The 10-year U.S. Treasury yield has already fallen to seven-month lows below 3.9%, reflecting investor demand for safety.

In summary, the tariffs imposed by President Trump have had a significant negative impact on the 'Magnificent Seven' megacap U.S. tech stocks. To mitigate these risks, investors can diversify their portfolios, focus on less affected sectors, monitor the Federal Reserve's actions, and consider the potential for a U.S. recession. The current market volatility and recession fears present both challenges and opportunities for investors, and a balanced approach can help navigate these uncertain times.