Wentz Weekly: New Export Restrictions Hit Technology Sector

Wentz Weekly Insights
New Export Restrictions & Powell Add To Market Worries

U.S. stocks fell again last week for the seventh time out of the past nine weeks, after ending the week prior sharply higher. Tech stocks, mostly semiconductors, struggled with the Nasdaq underperforming with its 2.62% loss while the Dow was down 2.66% mostly due to a 22% decline in United Health after its earnings report which had a big impact on the index due to its high per share price. The clear winner the week was small caps with the Russell 2000 rising 1.10%.

Semiconductors saw a solid start to the week that came after Trump said many items like smartphones, chip making equipment, PCs, etc, would be exempt from the reciprocal tariffs, but those imported from China will still see the 20% tariff rate (related to the Fentanyl tariffs that was in the first round of tariffs). The exemptions cover about $390 billion worth of U.S. imports, including $101 billion worth from China.

However, that was short lived as one of the bigger news items from the week was Nvidia saying late Tuesday the U.S. government informed it on April 9 that its H20 products and any other similar products (the most advanced AI chip that can legally sell to China, one that Nvidia created to get around previous export restrictions) require a new license to export to China.

The license requirement addresses the risk that the products may be used in a supercomputer in China. As Barron’s noted, “If a Chinese company or government entity could put enough of them together, it may be able to build a supercomputer that might rival the largest in the world. The U.S. Department of Energy uses its supercomputers to simulate nuclear tests and war, and so one in China may pose a national security threat.”

Nvidia said its current quarter will see $5.5 billion of charges related to the new export requirement, with some analysts estimating a 8%-10% impact to earnings this year.

The additional export restrictions put more pressure on China, who is already seeing 145% tariffs on all exports to the U.S., as Nvidia’s chips are the most advanced in the world and provide the most computing power for those developing advanced AI. It could also be quite disruptive with the restriction going into place immediately instead of allowing supply chains the time to adjust.

China companies have been working on creating their own chips that could be used to power AI with leader Huawei reportedly planning to start mass shipments of its advanced AI chip to Chinese customers as early as next month, potentially offsetting some of the impact of the new U.S. export restrictions. Huawei said last year it was testing a new chip that it said was comparable to Nvidia’s.

Sentiment also took a hit after a speech by Fed Chairman Powell at the Economic Club of Chicago Wednesday afternoon that had a more hawkish takeaway than anticipated. Notably, he said the level of tariffs announced have been “significantly larger than anticipated” and “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.” He added that tariff driven inflation could have long-term and persistent effects, not something that has been said by Fed officials yet.

Powell noted how both surveys and market based measures of near-term inflation expectations have ticked higher but importantly longer-term inflation expectations have remained mostly steady.

On a positive note, Powell said consumer spending remains solid and the unemployment rate is low and stable. Regarding policy, the Fed will wait for greater clarity on economic impacts before considering any adjustments to policy. Powell still believes inflation is moving toward its 2% goal, but said they need greater confidence before further cutting rates, and achieving such confidence is likely going to take longer than previously expected due to the Trump tariffs.

We will see a number of Fed officials with comments the first half of this week before it tapers off by the end of the week with Fed officials in a quiet period beginning Saturday ahead of their May 6-7 policy meeting.

The other big event is the ramp in earnings season – nearly 25% of S&P 500 companies are set to report results this week with another chunk of the S&P 500 coming next week, including most of the Magnificent 7 names. We believe Q1 results were solid but there is an immense amount of uncertainty, the highest since the Covid lockdowns five years ago, on the outlook given tariffs and the impacts. This is weighing on earnings revisions, with some companies even providing multiple outlooks with one to account for tariff impacts, a subject that will remain top of mind for investors.

Week in Review:
Stocks were lower last week which was driven by a big underperformance in technology due to new export restrictions. Breadth was not as bad as recent weeks, with small caps performing much better. The major U.S. stock indexes finished as follows: Russell 2000 +1.10%, S&P 500 -1.50%, Nasdaq -2.62%, and Dow -2.66%. U.S. Treasuries bounced back recovering some of its recent losses as yields moved back down across the curve – the 2-year Treasury note yield fell 17 basis points to 3.81% while the 10-year yield fell 16 bps to 4.33%. The dollar index fell once again, now down to its lowest level in multiple years, after a 0.72% decline last week. Gold continues its strong run, one of the best assets classes, with a 2.68% gain to a new high. Bitcoin rose 1.25%. Oil bounced 5.17% but concerns on oversupply and slowing economic growth are keeping a cap on prices.

Recent Economic Data

• Retail Sales: Monthly retail sales increased 1.4% in March, a strong bounce after two weak months to start the year and right in line with consensus expectations for the largest monthly increase in over two years. However, most of the bounce was due to a strong 5.3% increase in vehicle sales, which may potentially be due to purchases ahead of tariff impacts. Sales excluding vehicle sales were up 0.5%, which is still solid and a little above expectations. Only two of the 13 major retail categories saw a decline in sale – gasoline and furniture. Strong increases were seen in building materials, sporting goods/hobby stores, restaurants and bars, and health/personal care. Sales have increased 4.6% from a year ago, 3.6% excluding vehicles and up 1.2% after accounting for inflation. It is also worth noting, revisions for February were quite positive, with retail sales up 0.7% (excluding vehicles) which was up from the initial estimate of 0.3%.
• Empire State Manufacturing Index: The Empire State Manufacturing index was -8.1 for April, near expectations and suggesting manufacturing conditions in the New York region continue to contract, although not as bad as last month’s -20.0 reading. The report noted a drop in new orders and shipments, with supplier availability worsening. Employment was unchanged while input prices increases and selling price increases picked up to the fastest pace in over two years. Firms turned pessimistic about the outlook for the first time in two years with the business conditions index falling to the second lowest reading in the survey’s 20+ year history.
• Philly Fed Manufacturing Index: The Philly Fed manufacturing Index was -26.4 for April, a big setback after a positive 12.5 in March. The report noted the survey indicators for new orders and shipments turned negative, employment was steady, but price indexes continue to indicate overall price increases. About 4 out of every 10 firms noted decreases in activity in the month with only 1 in 10 reporting an increase in activity.
• Industrial Production: Industrial production decreased 0.3% in March, near expectations, and comes after a stronger 0.8% increase in February. The decline was due to another big decline of 5.8% in utilities which the Fed blamed on an unusually warm March which reduced the need for heating, which was partially offset by continued growth in manufacturing, up 0.3%, and mining, up 0.6%. The capacity utilization rate was 77.8%, falling from February’s 78.2%, and still about two percentage points below the historical average.
• Housing Market Index: The housing market index, which is a measure of homebuilder sentiment, was 40 for April, up slightly from 39 in March which was the lowest since 2023 and a very depressed level. The index on present sales improved 2 points to 45 but the expected sales the next six months turned lower with the index down 4 points to 43. Finally, the index on traffic of prospective buyers was only up one point to 25. Although some of the index readings improved slightly, they are still at historically low levels.
• Housing Starts & Permits: The number of housing starts declined by 11.4% in March to a seasonally adjusted annualized rate of 1.324 million, coming after a brief increase in February. Compared to a year ago, the number of starts is up just 1.9%. The number of permits to build a new home was at an annual rate of 1.482 million, 1.6% above February’s levels and relatively unchanged from a year ago. The number of homes authorized for new builds but where construction hasn’t started has remained relatively flat for about 3 years now after a spike from the pandemic. However, a not so welcoming sign is the number of homes under construction has steadily declined after peaking in 2022, now down 15% over the past year.
• Jobless Claims: The number of unemployment claims the week ended April 12 was 215,000, down 9k from the prior week, with the four-week average down a little to 220,750. The number of continuing claims was 1.885 million, up 41k from the prior week with the four-week average up slightly to 1.867 million.

Company News

• Nvidia: Nvidia stock moved lower mid-week after the company said the U.S. government informed it on April 9 that its H20 products and any other similar products (the most advanced AI chip that can legally sell to China) require a license to export to China, adding the license requirement addresses the risk that the products may be used in a supercomputer in China. Nvidia said its current quarter will see $5.5 billion of charges related to the new export requirement. There were follow up reports that Nvidia kept some of its Chinese customers in the dark about the new restrictions.
• Taiwan Semiconductor: Shares of Taiwan Semiconductor were higher Thursday after reporting earnings that were much better than expected and relieving investors in the semiconductor sector after the Nvidia news. It reiterated its 2025 growth guidance and provided Q2 and Q3 guidance above expectations. It said it has not seen any change in customer behavior after the tariff announcements. However, it said it is too early for any meaningful clarity on impacts from tariffs, with some analyst saying that the guidance may be conservative.
• Apple: Apple’s iPhone production rose 60% in India over the past 12 months through March, to $22 billion (manufactured value), according to a report by Bloomberg. The company now produces 20% of its iPhones in India.
• Netflix: Bloomberg reported Netflix is testing a new search technology that is powered by OpenAI (the company behind ChatGPT) which will allow users to search for shows using more specific terms, such as your mood, and allows searches to go beyond just names or genres. Separately, per the WSJ, the company held its annual business review meeting last month where it revealed a target to achieve a $1 trillion market cap, double its revenue, and triple its operating income by 2030. Executives also said they intend to focus on adding subscribers overseas, especially in markets that have high broadband penetration like Brazil and India.
• Nvidia: Nvidia announced it will plan to produce up to $500 billion of AI infrastructure in the U.S. via its manufacturing partnerships over the next four years, a move to produce its supercomputers entirely in the U.S. It said it has commissioned more than one million square feet of manufacturing space to build and test Nvidia Blackwell chips in Arizona and AI supercomputers in Texas.
• Meta: Meta CEO Zuckerberg said in the FTC’s antitrust trial against the company that Facebook thought about spinning off Instagram in 2018, quoted “I wonder if we should consider the extreme step of spinning Instagram out as a separate company. As calls to break up the big tech companies grow, there is a non-trivial chance that we will be forced to spin out Instagram and perhaps WhatsApp in the next 5-10 years anyway.” He also admitted Instagram was purchased because it had a better camera compared to the one he was trying to build. The FTC antitrust trial is aiming to force Meta (parent company of Facebook) to split off its WhatsApp and Instagram businesses.
• Lowe’s: Lowe’s said it has agreed to acquire Artisan Design Group, a leader in design, distribution, and installation services, for $1.325 billion via cash on hand. The move will help it expand its Lowe’s Pro offerings into a new distribution channel in a $50 billion market.
• Pinterest: It was reported by The Information that Pinterest considered spending nine figures on an acquisition to boost ad sales, thinking about a purchase to help it compete with Meta.
• Capital One: Capital One said U.S. regulators gave approval to its proposed acquisition of Discover Financial. Capital One previously said it would acquire global payments network Discover in an all-stock deal worth $35.3 billion. Discover was the smallest of the four major U.S. based global payment networks (Visa, Mastercard, and American Express).

Other News:

• China’s Q1 Growth: China’s economy grew 5.4% in the first quarter as retail sales, which grew 5.9%, and factory output, which grew 7.7% for the fastest since 2021, beat estimates. However, China acknowledged that the environment is causing an unfavorable impact on its economy in the current quarter.
• Tax Bill Updates: Some members of Congress are drafting and analyzing how to best create a new tax bracket for millionaires with the House looking to propose a new 40% tax bracket for those earnings over $1 million, adding that Trump was open to the idea. Also, White House Press Secretary Leavitt said Trump has not made a decision on raising the corporate tax rate to help pay for other tax cuts. One of Trump’s top Economic Advisors Kevin Hassett said he expects Republicans to pass the reconciliation bill by early summer and “things are moving very, very quickly.”
• Fed Chairman Powell Speech: Speaking at the Economic Club of Chicago, Fed Chairman Powell said that the level of tariffs announced have been “significantly larger than anticipated,” and “the same is likely to be true of the economic effects, which will include higher inflation and slower growth.” The latter statement is the first time we have heard Powell talk about the possible effects of the tariffs. He also made remarks on inflation expectations, which have risen dramatically in the short-run, but said they remain well-anchored in the longer-run. He added that analyzing the latest inflation data in the context of rising inflation expectations will be difficult, and tariffs are “highly likely to generate at least a temporary rise in inflation.” Trump wasted no time commenting, in a Truth Social post saying Powell should lower rates now and his termination cannot come fast enough.
• Tariffs:
  • Technology (mostly stocks related to smartphones, chipsmaking, PCs) were clear winners to open last week after it was reported that many electronic products like smartphones, chipmaking equipment, PCs, and routers, will be exempt from the Trump reciprocal tariffs, but those imported from China will still see the 20% rate (the Fentanyl tariffs). The exemptions cover about $390 billion in U.S. imports including $101 billion from China.
  • However, there were follow up comments from Commerce Secretary Lutnick that the exemptions are only temporary and there will be semiconductor tariffs expected to be announced soon, while Trump said phones, computers, and other electronics will still be hit with tariffs, “they are just moving to a different tariff ‘bucket’” adding that the administration will take a look at the whole electronics supply chain in the “upcoming National Security Tariff Investigations.”
  • The Trump Administration released documents announcing it has initiated investigations under Section 232 of the Trade Expansion Act of 1962, which allows the President to restrict imports deemed a threat to national security, with the goal to “revive U.S. manufacturing in critical technology.” This kicks off the process for implementing sector-specific tariffs, with the administration targeting semiconductors and pharmaceuticals.
  • Trump said he is considering tariff exemptions for car companies to provide relief as they work to reconfigure their supply chains, saying “they need a little bit of time.”
  • Bloomberg reported U.S. and European Union trade talks have made very little progress and a bulk of the tariffs may not be removed. Also, the Financial Times reports the EU commission said the U.S. has not yet informed the EU what it wants to lift tariffs.
  • China said it has named a new top trade negotiator and said it will agree to talks with the U.S. if it follows a series of steps including greater respect to China, designating a clear point person for trade negotiations, more consistency in its trade position, and a willingness to address China’s concerns around American sanctions.
  • Trump participated in trade talks with Japan and U.S. representatives and said following the talks that the negotiators made “big progress”. While the talks did not result in the immediate halt to tariffs, Japan lead negotiator said preparations for a second round of talks are underway.