INTC Intel Corporation

By Jessica Menton 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 19, 2019).

Shares of chip makers are surging toward their best quarter in more than two years as U.S.-China trade tensions have thawed, but they face a critical test as a trade deal is hammered out.

The PHLX Semiconductor Index, which includes chip makers such as Intel Corp., Nvidia Corp. and Advanced Micro Devices Inc., has advanced 20% in 2019, topping the S&P 500's 13% rise this year and heading toward its best three-month period since the third quarter of 2016. The index is 4% away from its record, set in March 2018.

Shares of semiconductor companies, which have been caught in the crosshairs of the trade battle, have bounced back as tensions have eased. But stumbling blocks remain, including concerns over China's policies on intellectual property, technology, cybersecurity, currency, agriculture and energy.

If a trade agreement doesn't come to fruition or terms of the deal disappoint, analysts caution it could upend the rally in chip shares.

"The space that has benefited the most from the China black cloud being removed from tech is semiconductors," said Daniel Ives, a Wedbush Securities analyst. "But those stocks would be front and center in terms of being punished if the ultimate trade deal isn't what investors were hoping."

Semiconductor shares are vulnerable to a trade war because China is a strong driver for the chip-equipment sector, which includes several hot areas of growth including gaming and artificial intelligence.

The tariff battle threatens to raise costs for companies, which investors fear will dent profit growth. The S&P 500 semiconductor group is expected to report a 24% drop in first-quarter profits from a year earlier, compared with a 3.7% decline expected for the S&P 500, according to FactSet.

The U.S. already imposed tariffs on $250 billion of imports from China last year, as well as levies on steel and aluminum. President Trump delayed an increase in tariffs on Chinese goods that had been set to take effect earlier this month, as both sides discuss a date for a potential summit.

"With tariffs going up, it's going to create slower export opportunities for companies," said David Spika, president of GuideStone Capital Management.

Pressure on chip stocks could be a bad sign for the broader market; the S&P 500 and its semiconductor group, which makes up 3.7% of the total index, have moved in the same direction 79% of the trading days this year, according to Dow Jones Market Data.

Investors fear the tariff spat and a stronger dollar could hurt demand for U.S.-made products. The Federal Reserve, which has held off on lifting short-term interest rates, is monitoring business spending closely as demand has waned for U.S.-made computers and electronic products. Global personal-computer shipments slumped in the fourth quarter, sliding 6.9% from a year earlier, according to research firm Gartner. World-wide sales of smartphones also stalled, climbing 0.1% from a year ago, separate data from Gartner showed.

Wall Street is seeking more concrete details on the trade negotiations. Two key issues investors want resolved: Chinese intellectual-property theft and cyberspying. U.S. technology companies are seeking new guardrails to crack down on the theft of emerging wireless technology known as 5G and cloud computing. Investors are also looking for the two countries to soften their stance on merger-and-acquisition activity after the U.S. blocked Singapore-based Broadcom Ltd.'s planned $117 billion takeover of chip maker Qualcomm Inc. last year on national-security concerns.

Michael Arone, chief investment strategist at State Street Global Advisors, cautioned that the U.S. still faces trade skirmishes beyond China, including the U.S. Mexico Canada Agreement to replace Nafta and a post-Brexit U.K.

"There might be progress with China, but there are still trade challenges on multiple fronts with Europe, Canada and Mexico," Mr. Arone said. "When it comes to the U.S.-China trade deal, the devil will be in the details."

Write to Jessica Menton at Jessica.Menton@wsj.com

(END) Dow Jones Newswires

March 19, 2019 02:47 ET (06:47 GMT)

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