Unsettled Tariffs Weigh On U.S. Tech Companies

The U.S. technology sector is navigating significant trade policy uncertainty. The 90-day pause on reciprocal tariffs and key technology import exemptions provides temporary breathing room for the industry. However, substantial uncertainty persists regarding the ultimate tariff timeline and rates. U.S. officials have also telegraphed new tariffs for the semiconductor sector.

In our report "Tariff Uncertainty Will Weigh On U.S. Tech Credit Outlooks", published April 24, 2025, our preliminary view is that global IT spending growth will likely slow to 5%-7% in 2025 from our previous forecast of 9%. We expect significant impact on consumer-focused products such as PCs and smartphones compared to enterprise-focused hardware such as servers, storage systems, and networking equipment. Semiconductor demand patterns will generally mirror those of the end products they power.

Most technology companies will face margin headwinds, particularly in the second half, though we have not yet taken related rating actions. This approach accounts for potential mitigating measures within supply chains, financial cushion at current ratings, and uncertainty regarding the long-term tariff framework. For now, we are more focused on second order effects from a potentially weakening macroeconomy. This presents particular risks for companies with limited financial cushion or those dependent on a positive operating environment to improve credit metrics.

After Dodging Immediate Downturn, Is Tech In For Hard Or Soft Landing?

The sector largely sidestepped an immediate slide in the first quarter. Some segments, particularly PCs and smartphones, even benefited due to order pull-ins to get ahead of tariffs, though this could weigh on second-half performance. The sector is watching for the long-term tariff policy that emerges from negotiations with China. Equally important will be the resolution of reciprocal tariffs affecting the rest of the world and the structure of anticipated semiconductor sector tariffs.

We've picked up signals that suggest semiconductor tariffs may be phased in over several years to allow supply chains to adjust--a best-case scenario. It is unclear how receptive the U.S. government is to this approach or if it's just wishful thinking by industry lobbyists proposing their favored solutions. While the government has demonstrated flexibility by pausing reciprocal tariffs and exempting many hardware categories, acknowledging the sector's strategic importance, we cannot rule out a more aggressive approach.

Inventory destocking could drag on the second half, particularly in segments such as PCs and related components with an inventory buildup to front-run upcoming tariffs. Many companies have highlighted increased uncertainty as long-term tariff policies remain undefined with a wide array of potential outcomes. Some companies have responded by widening their guidance ranges.

For the first half, most companies have signaled no impact or only modest effects from tariff conditions. This reflects a benign environment given the hardware exemptions. Customer buying patterns are largely unchanged, according to companies such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and International Business Machines Corp., although the latter cautioned that its consulting business is more susceptible to an IT spending pullback by enterprises and the U.S. government.

Others such as Intel Corp. noted modest pull-in activity. Margin impacts vary, with Apple Inc., KLA Corp., and Ericsson reporting approximately 100 basis points of impact, while others such as chipmaker Qualcomm Inc., hard drive manufacturers, and NXP Semiconductors N.V. report minimal or no effects.

Apple guided for a $900 million impact in the June quarter, representing about 1% of revenue, primarily resulting from the minority of U.S.-bound iPhones manufactured in China. The company has made significant progress in supply chain diversification, with most iPhones sold in the U.S. now coming from India. We expect it to aggressively expand this strategy. Almost all iPads, Macs, Apple Watches, and AirPods sold in the U.S. now come from Vietnam, though China remains the country of origin for most products sold outside the U.S.

We expect the tariff impact to increase after the June quarter. Apple pulled forward shipments before tariffs become effective and potential semiconductor sectoral tariffs further increase the effects. The company also emphasized its commitment to U.S. manufacturing, highlighting plans to source 19 billion chips from the U.S. in 2025, including advanced chips from TSMC's Arizona facilities. This follows a $500 billion commitment to invest in the U.S. over the next four years, including a facility in Texas that will make AI servers.

Meta Platforms Inc. raised its capital spending target for 2025, partly due to higher hardware costs--an early signal confirming that price increases in data center equipment are coming. Despite these cost pressures, the investment plans of other hyperscalers remain intact.

Intel acknowledged order pull-forward into the first quarter and flagged possible cost increases and addressable market contractions. It also observed a shift toward lower-cost products as PC manufacturers attempt to manage the cost impact of tariffs.

Tariff Mitigations Trying To Hit A Moving Target

Companies are accelerating efforts to move manufacturing out of high-tariff jurisdictions into lower-tariff alternatives. For now, this primarily means shifting production to Southeast Asia and Mexico.

But tariff policy has been volatile. Based on policies under the first Trump administration, many companies moved manufacturing from China into Southeast Asia and Mexico, only to have the second Trump administration target those countries before providing a short-term reprieve. The effectiveness of these geographic shifts may diminish depending on the resolution of reciprocal tariffs affecting Southeast Asian countries. The U.S.-Mexico-Canada Agreement (USMCA) exemption remains a lynchpin of tariff mitigation strategies.

Most companies have adopted a "China-for-China" strategy, whereby manufacturing operations in China are specifically for products destined for the Chinese market, helping them avoid China's retaliatory tariffs. Finally, we expect companies will seek to mitigate lingering tariff impacts they can't offset with price increases, though passing these on varies by market segment and competitive position.

First-Half IT Spending May Leave Second-Half Hangover

With ongoing trade tensions, we preliminarily lowered our forecast for global IT spending growth to 5%-7% from our previous 9% projection. However, the tech sector demonstrated unexpected resilience in the first quarter, with earnings generally outperforming expectations against a challenging macroeconomic backdrop. The reported 0.3% decline in first-quarter U.S. GDP was primarily driven by significant net imports due to tariff front-running, which somewhat overstated weakness in underlying demand. Indeed, the pull-forward of demand for tech imports likely contributed to the GDP contraction.

Enterprise AI implementation is transitioning from proof-of-concept to wider deployment. Microsoft Corp. reported commercial bookings growth of 18%, supported by AI that is rapidly becoming integrated with traditional cloud workloads rather than replacing them. The company highlighted three key areas of focus regarding AI:

• Horizontal productivity tools such as Microsoft 365 Copilot;
• Custom agents; and
• Industry-specific applications in health care, manufacturing, and retail.

ServiceNow Inc. reported impressive AI adoption, with Pro Plus deals more than quadrupling year over year. The firm is positioning itself as the "AI operating system for the enterprise" with new agentic innovations. However, Apple delayed some AI Siri features until 2026 to ensure quality, demonstrating the challenges of integrating AI into products and workflow beyond chatbots.

PC demand was better than seasonal in the first quarter, with global unit shipments up 4.9% year-over-year according to International Data Corp. (IDC), driven by tariff-related pull-forward purchasing. But uncertainty looms for the second half of 2025.

We believe industry players are taking advantage of tariff pauses and exemptions, building inventory and adjusting supply chains. Prices are already increasing in the U.S. We expect this to affect the consumer segment more than enterprise, which is more inclined to upgrade before the Windows 10 end of life in October. Nevertheless, some enterprises are delaying hardware refreshes or opting to pay for extended Windows 10 support. We also believe the market is adopting AI PCs slower than expected due to cost controls and lack of use cases. Increased shipments during the first half ahead of new tariffs likely sets up a weak second half.

Global smartphone units increased 1.5% year over year in the first quarter, according to IDC. The U.S. market was up more than 5%, benefiting from manufacturers ramping up production to front-run potential tariffs like the PC market, though more modest because of a higher mix of more price sensitive consumers. China's smartphone market expanded 3.3%, bolstered by government subsidies for devices priced below RMB6,000 ($820). Market share dynamics continue to shift, with Apple losing its top position in China to Xiaomi Corp. as some of its higher-end models were excluded from the subsidy program due to the price cap. Apple's overall share shrank to 13.7%.

Server demand remained strong in the first quarter, supported by replacement cycles and order pull-in, particularly in the hyperscaler segment. However, mounting concerns about demand sustainability for the second half comes amid macroeconomic uncertainty and substantial inventory builds. We expect cloud demand to be more resilient than enterprise given the AI infrastructure buildout.

We believe the server market is in a more favorable position regarding tariffs than PCs and smartphones given its greater exposure to USMCA-qualified Mexico production.

Planned Hyperscale Spending Increased Despite Macro Uncertainty

First-quarter earnings provided clear signals that AI-driven demand continues to support robust growth for cloud platform providers. Microsoft reported Azure growth of 35% in constant currency, up four percentage points from the prior quarter, with AI services contributing 16 percentage points of growth and outperformance in the non-AI business indicating broad-based demand strength. The distinction between AI and non-AI workloads is likely to become more difficult over time as AI gets more tightly integrated into more systems and processes.

Amazon Web Services delivered 17% growth, slightly decelerating from the fourth quarter of 2024 but maintaining strong momentum with a multibillion-dollar AI business expanding at triple-digit percents. Alphabet Inc.'s Google Cloud posted 28% growth, with Google Cloud Platform expanding quicker. Microsoft noted capacity constraints will extend beyond June despite bringing capacity online faster than expected, while Google highlighted "more customer demand than capacity" at quarter's end. Amazon CEO Andy Jassy stated bluntly: "As fast as we actually put the capacity in, it's being consumed."

Cloud providers remain committed to significant infrastructure investments in 2025. Meta raised its 2025 capital expenditure (capex) guidance to $64 billion-$72 billion from $60 billion-$65 billion, a 73% increase over 2024 at the midpoint. The increase is due to both additional data center investments and higher hardware costs, anticipating the inflationary effects of potential tariffs.

Microsoft expects a sequential increase next quarter with lower projected fiscal 2026 growth. Roughly half of the company's cloud and AI-related spending in the third quarter was on long-lived assets that will support monetization over the next 15 years and beyond, but spending will include a greater mix of short-lived assets. This will mean that even as Microsoft's total capex growth slows, its spending on data center equipment will increase faster. Google reiterated its $75 billion capex plan for 2025, more than 40% growth. Amazon's spending of $24.3 billion last quarter was in line with comments last quarter that suggested it would be about $100 billion, nearly 30% growth.

Because of Meta's capex guidance raise, we expect spending from it, Alphabet, and Microsoft to increase in the mid- to high-40% area, up from about 40% last quarter and 20% to start the year before blockbuster guidance from Meta and Alphabet. We believe strong demand for training supports continued robust spending and an increasing share of inference workload as AI use cases become more widely adopted. The group is unlikely to maintain its breakneck pace in 2026, particularly amid reports of lease cancelations and heighted focus on resource efficiency. Even if the growth falls to 15%-25%, it will be a rich environment for AI enablers.

Semiconductors: AI Booming And Trade Disruption Looming

Global semiconductor industry revenue increased 19% year over year in the first quarter. We expect this to slow through the year, more in line with our expectation at the start of the year for growth of 12%. Year-over-year comparisons become more difficult, particularly in memory. We also believe the first half is benefiting from some pull-in of demand and inventory stocking that will drag in the second half independent of tariffs. This will likely compound the headwind, the severity of which determined by the reciprocal tariff resolution and structure of semiconductor sectoral tariffs. With our reduced expectation for global IT spending growth, we forecast 12% semiconductor growth with some downside risk.

AI Continues Sparking Growth Amid Trade Tensions

Hyperscale demand remains robust, with higher U.S. cloud service provider capex in 2025. TSMC's earnings provided a strong validation of the AI growth narrative, and the company expects AI-related revenue to double in 2025 and at a mid-40% annual rate over the next five years. It expects its advanced packaging capacity to double in 2025, though demand still exceeds supply.

NVIDIA Corp., the leading AI chipmaker, faced a setback with new U.S. export restrictions. The company announced it would take a $5.5 billion inventory charge after being notified that exports of its H20 GPUs to China would require licenses, a product the company specifically designed to comply with prior export rules. While the restriction will leave a meaningful void in data center revenue, its China exposure is already well below pre-export controls. Advanced Micro Devices Inc. (AMD) similarly faces up to $800 million in charges due to the same restrictions on its MI308 products.

General Purpose Semiconductors Show Signs Of Recovery

Broad-based semiconductor categories are diverging from AI-driven segments, but recent earnings reports indicate positive momentum. Texas Instruments Inc. (TI) delivered better-than-expected first-quarter results and guidance for the next quarter, with industrial segment revenue increasing sequentially after seven consecutive quarters of decline. Its automotive segment also showed modest growth.

NXP noted that automotive revenue will be flat year over year in the second quarter, the first time after five quarters of decline, signaling stabilization. Recent auto tariff adjustments provide relief with the White House saying vehicles with 85% U.S. or USMCA content would effectively owe no tariff.

Distributor inventories continue to normalize, with NXP reporting nine weeks of inventory (below its long-term target of 11 weeks). Companies are reporting improving order signals, particularly from Asia, with TI noting that customers are rebuilding inventory from extreme lows after two years of destocking.

Rising Competition From China

China is encouraging domestic AI developers to increase purchases of homegrown chips, with Huawei emerging as the primary alternative to NVIDIA. Shortly after the H20 export ban, Huawei announced that it expects its Ascend 920 AI chip to enter mass production in the latter half of 2025 as the successor to the Ascend 910C, which delivers approximately 60% the performance of NVIDIA's H100 chip. Huawei is preparing to test the more advanced Ascend 910D processor aimed at rivaling NVIDIA's high-end chips.

Though the Chinese advanced semiconductor ecosystem faces challenges in producing at scale, particularly with Huawei cut off from TSMC, chipmakers are using a brute force technique to build larger and less power-efficient clusters as well as design more efficient systems to leverage them. China is also investing in more trailing-edge nodes, particularly above 28nm, and making progress at leading-edge nodes including 7nm and 5nm.

Memory To Resume Growth; Second Half In Question

The memory market slowed in the first quarter, with major players indicating it was temporary rather than the beginning of a cyclical downturn. Strong second-quarter guidance points to resumed growth, although the second half remains highly uncertain.

In the first quarter, DRAM revenue was relatively stable with price decreases for conventional DRAM but an increasing mix of high-bandwidth memory (HBM) for AI applications. NAND was down more than 20% due to a short-term inventory correction in the data center market. Some demand pull-ins in the first quarter were because of tariff concerns, particularly in the mobile and PC segments.

The second quarter should show some recovery, with Micron Technology Inc. forecasting a 9% sequential increase in revenue, to levels modestly higher than two quarters ago, and SK Hynix Inc. and Samsung Co. Ltd. guiding for double-digit percentage bit growth for both memory categories. Continued demand for HBM, recovery in the PC and smartphone markets, and supply discipline in NAND will support results next quarter. While visibility beyond the second quarter remains low, with potential reversal from pull-in demand, the underlying AI-driven demand for HBM remains robust. Industry leader SK Hynix maintains its forecast of HBM revenue more than doubling in 2025 and increasing 50% annually from 2024-2028.

Memory producers continue showing supply discipline. Samsung's memory capex is unchanged, SK Hynix is reallocating resources away from low-demand products, and Micron's NAND wafer output is down in the mid-teens percents.

Tariff Uncertainty Will Likely End Positive Rating Trend

Since the beginning of 2025, we have taken 13 positive rating actions on U.S. technology companies--seven on investment-grade issuers and six on speculative-grade issuers. We also took 10 negative actions, nine in the speculative-grade category. Five stemmed from increasing default risk as macroeconomic uncertainty abounds following multiple years of elevated interest rates, which has significantly reduced cushion within cash flow available to absorb market downturns.

We have not yet taken rating actions directly related to tariff announcements because of potential mitigants within the supply chain, cushion within ratings, and uncertainty around long-term tariff policy. We also believe the first half of 2025 is likely to benefit from demand pull-ins and that credit metrics will support our ratings. However, we continue to review ratings and could downgrade issuers with little to no cushion or those that depend on a positive operating environment. We could also take actions if our view of the macroeconomic environment deteriorates further or tariff constraints are greater than we expect.

We expect the positive rating trend since June 2024 to reverse in the coming months. The conviction required to support positive actions has increased amid the tariff-driven macroeconomic uncertainty, particularly for hardware companies that may face direct burdens from long-term tariff policy. In addition, increasing macroeconomic uncertainty may tip the scale for weaker companies with little cushion.

Nine upgrades since the start of the year had no consistent theme. Examples:

Broadcom Corp.: To 'BBB+' with a positive outlook due to its enhanced ability to absorb large acquisitions within rating constraints, bolstered by significant scale and certain regulatory limitations on pursuing large targets. Good momentum in AI-related business segments and increased software exposure also supported the upgrade.

AMD: To 'A' following substantial market share gains in x86 product segments and good opportunity in AI accelerators.

Western Digital Corp.: To 'BB+' following the Sandisk Corp. spin-off, which meaningfully reduced net debt.

We downgraded four companies during the period, all resulting in ratings in the 'CCC' category or lower, indicating capital structures that we view as unsustainable. This includes a selective default for Astra Acquisition Corp. following an agreement to waive interest on its second-lien debt instrument.

We revised outlooks to negative for six issuers, including one investment-grade company (Akamai Technologies Inc.) due to acquisitions and restructuring costs. Conversely, we revised four outlooks to positive, including Intuit Inc. based on an improving assessment of its business strength and Keysight Technologies Inc. for consistently maintaining low leverage.

Between early February and mid-March, we assigned six new ratings, including on Synopsys Inc. because of its pending acquisition of Ansys Inc.

Related Research

• Tariff Uncertainty Will Weigh On U.S. Tech Credit Outlooks, April 24, 2025