Will a Trade War With China Hurt Tech Stocks?

The technology sector has been one of the S&P 500's best-performers, up 14 percent year-to-date, and until now, tech appears mostly unscathed by the rattling of trade war sabers between the U.S. and China.

But what's the likelihood this could continue? Parts of the U.S. technology sector rely on Chinese manufacturing and if trade war rhetoric continues to escalate, will investors start to change their mind on technology?

Maybe, say market watchers. But there are other factors that could singe the wings of the high-flying sector that have little to do with the trade disputes.

Not trade war, but not trade peace. Amanda Agati, co-chief investment strategist at PNC Financial Services Group in Philadelphia, says PNC doesn't believe a trade war between the U.S. and China will occur, despite the heightened rhetoric, tariffs and counter-tariffs imposed by the two countries. But that doesn't mean they're dismissive of what's happening.

[See: The 10 Most Valuable Tech Companies in the World.]

"I always joke with people that it's not a trade war, but it's not trade peace either," she says. "We don't think that this is going to die down anytime soon necessarily, but we also think that it will stop short of a full-blown trade war."

Eric Schoenstein, portfolio manager of the Jensen Quality Growth Fund at Jensen Investment Management in Lake Oswego, Oregon, says it's hard to gauge what what's going to happen.

"Part of the difficulty with the tariffs and trade wars is to what extent that might be a negotiating tactic to force people to come to the table," he says.

Agati says for now the U.S. tariffs against China appear focused more on the raw material side, versus finished components such as parts for smartphones like Apple's (ticker: AAPL) iPhone.

"That does keep a lot of technology companies out of the fray a little bit," she says. "The question is whether the rare-earth minerals component that goes into all these various complex product side would be impacted and I don't know the answer to that."

That could change if the White House follows through on its threat to place tariffs on all Chinese imports to the U.S., which President Donald Trump said he might do. So far the U.S. has imposed tariffs on $34 billion of Chinese goods and China has done the same on U.S. imports.

Schoenstein adds there is the potential for tariffs to have to have an impact on companies that manufacturer overseas, but at the same time there's also some inherent resilience with some of the larger tech players since their manufacturing isn't concentrated in China.

Jeremie Capron, director of research at ROBO Global exchange-traded fund in New York, says China won't put any tariffs on any U.S. tech sector companies like semiconductors "because that would be like shooting yourself in the foot."

The sector has priced in some uncertainty over what's happening with the tariffs on both sides, but he says the movements suggest it's more about uncertainty than outright concerns about companies' fundamental health.

[See: 7 Small-Cap ETFs to Help You Win a Trade War.]

The sector has been affected by the headlines. The sector fell in late June and early July when the tariffs went into effect, with the Technology Select Sector SPDR Fund ETF ( XLK) dropping and then rebounding, only to slip again after Trump's comments last week.

However, Schoenstein says, investors shouldn't dismiss the trade-war rhetoric. He says investors haven't given the concerns about trade wars full credence.

"It's been quite some time since we actually had engaged in a trade war," he says. "Obviously the returns in the market have been such that it seems like a lot of things the last few years, no matter how negative something sounds, we don't really pay a lot of attention to the risk."

Dollar strength concerning. Agati says currency factors may be a greater risk for the tech sector. The U.S. dollar is strong overall, and particularly against the yuan.

"The potential for China to devalue the yuan ... I think it's a much bigger concern and issue not only for tech but just broadly speaking," Agati says.

A strong dollar benefits domestic sales of companies and hurts overseas revenue. S&P companies overall generate about 70 percent of their operating margin in the U.S., but for the tech sector, that's closer to 40 percent. The tech sector performance leaders have expanded margins, while the laggards already had margin issues, Agati says. It's possible the currency effect will show up more in the names that were already struggling, she adds.

Schoenstein says investors should also be concerned about the concentration risk of technology stocks in the indexes overall. The top tech-sector stocks in terms of benchmark size for an index like the Russell 1000 Growth is more concentrated now that was during the 2000s tech bubble, he says.

"If you're really trying to make an investment case to be the near benchmarks such as the Russell 1000 Growth, you're going to have to take some extreme concentration risk," he says. "Given a sector like technology that does have this potential to be impacted by tariffs and trade, [a correction] could be pretty daunting in some respects."

Agati says she'll also watch to see whether there will be greater use of claiming national security interests when it comes to individual companies, such as the rejected merger of Broadcom ( AVGO) and Qualcomm ( QCOM) based on national security interests.

[See: 9 Mature Tech Stocks to Buy for Dividends.]

It may be too much to read into that one deal, but she says if regulation and oversight becomes stricter or pervasive, "I think that could potentially have an impact on tech," she says. "It's not a tariff per se, but it's certainly falls in the realm of protectionist policies."

Debbie Carlson has more than 20 years experience as a journalist and has had bylines in Barron's, The Wall Street Journal, the Chicago Tribune, The Guardian, and other publications. Follow her on Twitter at @debbiecarlson1.