How do Trump's tariffs affect the semiconductor industry? UBS is optimistic about these companies under policy shocks

According to the Zhitong Finance APP, after the Trump administration announced a new round of tariff policies last week, UBS attempted to quantify the potential impact on the semiconductor industry. By analyzing the correlation between U.S. GDP and semiconductor revenue (with a calculated correlation coefficient of -2.2 times), the bank found that for every 100 basis points change in U.S. GDP, semiconductor revenue would change by approximately 220 basis points.

Based on this, UBS's U.S. economists have downgraded the growth rate of real GDP in the U.S. for 2025 by about 120 basis points, which implies that the annual growth rate of semiconductor revenue may be impacted by about 260 basis points. It is expected that semiconductor revenue will reach USD 7.04 trillion in 2025 (a year-on-year growth of 17.0%, down from a previous forecast of 19.6%).

The bank also explored more moderate downside scenarios and extreme pessimistic scenarios—if a fully correlated scenario occurs (i.e., full retaliation from other countries), semiconductor revenue growth could be impacted by about 10 percentage points, which is five times the impact of a non-retaliatory scenario.

Affected by the approximately 16% drop in the Philadelphia Semiconductor Index (SOX) last week and market adjustments triggered by tariffs, UBS attempted to assess the market expectations reflected in current stock price levels. By quantifying implied expectations through the HOLT framework, the core indicator CFROI (Cash Flow Return on Investment with standardized accounting treatment) shows: CFROI for 2023 is 8%, for 2024 is 10%, while the current trading level implies that CFROI will moderately decline to about 9% over the next five years, with asset growth dropping from about 7% to about 2%.

From traditional financial metrics, the current level of SOX at around 3600 points corresponds to a revenue annual growth rate slowing from the current 9.9% by about 50 basis points each year, with no profit margin improvement or asset efficiency gains to offset this.

Although it is difficult to assert that semiconductor companies can completely avoid demand destruction related to tariffs, UBS firmly believes that artificial intelligence (AI) spending will remain resilient. The overall weak demand environment may force companies to accelerate the adoption of AI technology to reduce costs, therefore UBS will focus more on AI-driven targets, such as NVIDIA (NVDA.US) and Broadcom (AVGO.US)—these companies not only benefit from the AI wave but also have core business models dominated by pricing power. The bank is also optimistic about Texas Instruments (TXN.US), due to its significant advantages in domestic manufacturing layout in the U.S.

Despite holding a cautious overall attitude towards semiconductor equipment (SPE) stocks, in the current market correction, UBS is optimistic about Lam Research (LRCX.US), as its profit levels have long been below peers and its valuation has once again become attractive. **