President-elect Donald Trump promised tariffs for months. In less than two weeks, he can begin to implement them. Investors expect Trump to impose sweeping tariffs on many countries, including potential 60% tariffs on China.
Investors are trying to understand the magnitude of the tariffs and their implications. The stock market did not perform well the last time Trump announced tariffs, which torpedoed into a trade war with China. However, investors are more knowledgeable now and likely better prepared for what's to come.
Tariffs can have the unintended consequences of raising consumer prices and impacting the stock market. Two of the largest contributors to the market's gains in recent years were the consumer tech giant Apple(NASDAQ: AAPL) and the artificial intelligence chip king Nvidia(NASDAQ: NVDA). Which will be impacted the most by Trump's looming tariffs?
Apple is very dependent on China
Consumers globally purchase Apple's many popular products, from the iPhone to the AirPods. Trump's promise to impose especially high tariffs on China could be problematic because Apple's revenue is heavily reliant on the country. China is Apple's third-largest buyer of iPhones, and sales from China made up nearly a fifth of Apple's revenue in 2023.
Barron's reported in November that as much as half of the costs to build the iPhone are derived from imported goods. If pricing for the iPhone 16 starts at around $800 and a 60% tariff is levied, an iPhone could jump in price by around $240. Apple did receive an exemption from tariffs in Trump's first term, so perhaps that will happen again, but analysts seem split on the matter.
In November, Jefferies analyst Edison Lee issued a report suggesting that if Apple does not receive an exemption this time around, its impressive 37% gross margins could decline by 3% to 6.7%. Lee is also concerned that emerging markets, which are considered major growth drivers for Apple, will also feel the pinch, especially as demand grows for locally produced products.
However, Wedbush analyst Dan Ives is less concerned about the impact of tariffs on Apple, writing in a note, "We believe the bark is going to be a lot worse than the bite... "
Can anything break Nvidia's incredible margins?
The impact of Trump's tariffs is less clear on Nvidia than on Apple, but the AI chip king will definitely face challenges. Nvidia is famous for the AI chips it designs. However, the company doesn't manufacture these chips. Rather, Taiwan Semiconductor builds them at its plants in Taiwan, as the company's plants are the only facility capable of manufacturing the groundbreaking technology.
Taiwanese officials have reportedly said in Congress that the impact of Trump's tariffs on the region's manufacturing would be "quite large." They also said they would assist companies in relocating their production. Other reports have come out saying that chipmakers like Nvidia are rushing to stockpile graphic processing units and get them to their U.S. warehouses to avoid paying higher prices once tariffs take effect.
Nvidia's CEO Jensen Huang has said that Nvidia could survive without Taiwan Semiconductor and move operations to a different fabrication facility if needed. However, there could be adverse effects, such as less effective process technology or a lower level of outperformance or cost, but the company would be able to meet orders. Still, geopolitical issues are nothing new for Nvidia. President Joe Biden's administration has contemplated limiting the quantity of chips to countries like China due to concerns about how the country might use its growing AI capabilities. Additionally, Nvidia's incredible gross margins in the mid-70th percentile offer the company more slack than others.
Which company will outperform?
For what it's worth, I think most of the "Magnificent Seven" companies are vulnerable and could be in for at least a temporary pullback at some point this year. Specifically related to tariffs, there are still many uncertainties, such as whether Apple will receive an exemption and the impact on Taiwan.
Both Nvidia and Apple face challenges, but I think Nvidia is better positioned with its abnormally high gross margins, pricing power, and high demand and enthusiasm for its new Blackwell chips. Apple could still fare OK, but I'm concerned that China's struggling economy could be exacerbated by the tariffs and hurt Apple more indirectly.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Jefferies Financial Group, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
