US domestic stocks face geoeconomic risk via supply chains

A study by Matteo Crosignani, Lina Han, and Marco Macchiavelli reveals that US domestic equity portfolios contain significant geoeconomic risk through indirect exposure to foreign markets. Even when portfolios appear purely domestic, they often include US firms that rely on global supply chains or sell to overseas customers.

Research tracking Chinese firms added to US export-control lists since 2014 shows that 20.3 per cent of domestic fund assets are invested in US companies with at least one Chinese customer. This figure rises to 43.3 per cent in science-and-technology funds. When a Chinese entity is placed on an export-control list, affected US suppliers experience an average cumulative abnormal return of −3.6 per cent, primarily within the first five trading days.

Active managers tend to respond by trimming holdings in both directly exposed suppliers and other China-linked US firms, a rebalancing process that typically lasts at least three months. In contrast, passive funds are unable to rebalance, resulting in a 31-basis-point monthly return drop for those with similar exposure levels.