China Policy Weighs on U.S. Chip-Equipment Stocks

December 31, 2025 at 07:12 UTC

5 min read

U.S. chip-equipment stocks decline amid China export controls and sourcing rules, semiconductor sector impact

Key Points

China is pushing chipmakers to source at least 50% of new fab tools from domestic suppliers.
Applied Materials, KLA and Lam Research shares slipped as the China rule hit sentiment.
U.S. export controls and new annual licenses for Samsung and SK Hynix add to policy uncertainty.
Investors are watching upcoming earnings for updated guidance on China demand into 2026.

China’s 50% domestic-equipment push hits U.S. toolmakers

Semiconductor equipment makers came under pressure after Reuters reported that Chinese authorities are requiring chipmakers seeking approval to build or expand fabrication plants to source at least 50% of equipment for new capacity from domestic suppliers. The rule, which is not publicly documented, is being enforced through procurement tenders and can be applied more flexibly where local tools are not yet available, according to people familiar with the matter. The policy aims for plants to move toward 100% domestic equipment use over time and has already been in force in recent months. The shift adds a new headwind for foreign toolmakers that have relied on China as a major end-market, even as U.S. export controls have tightened. Reuters also cited growing momentum for Chinese equipment vendors such as Naura and Advanced Micro-Fabrication Equipment (AMEC), including in etch tools where foreign suppliers have historically dominated.

Applied Materials slides as investors reassess China exposure

Applied Materials shares fell 1.17% on Tuesday to $259.97, snapping a seven-session winning streak and lagging the S&P 500’s 0.14% decline. Intraday, the stock traded around $260.27, down about 1.1%, while the iShares Semiconductor ETF was little changed. The move followed the China procurement report and came as investors weighed the company’s significant, though moderating, exposure to Chinese demand. Applied has previously disclosed that China’s share of its revenue has fallen to the mid‑20% range from nearly 40% in recent years and has said it expects chipmaking-equipment spending in China to decline in 2026 as tighter U.S. export controls limit market access. Despite the policy overhang, Wells Fargo raised its price target on Applied Materials to $290 from $255 and maintained an Overweight rating, saying the stock still trades at a discount to peers and is positioned for 2026 wafer fab equipment outperformance. On fundamentals, Applied’s shares have gained 3.26% over the past month, and analysts expect upcoming quarterly EPS of $2.21 on revenue of $6.86 billion, both down from a year earlier. Full‑year consensus calls for modest growth, with EPS of $9.55 and revenue of $28.97 billion. The Zacks Consensus EPS estimate has edged 0.52% higher over the past 30 days, and the stock carries a Zacks Rank of #3 (Hold), trading at a forward P/E of 27.53, below the Electronics – Semiconductors industry average of 36.1.

KLA and Lam Research also feel policy and valuation pressure

KLA and Lam Research shares moved lower alongside Applied Materials as investors digested the implications of China’s domestic-equipment threshold. KLA stock fell about 0.8% in midday trading to $1,250.43 and later closed down 1.33% at $1,243.65, underperforming the broader market. Over the past month, KLA shares have risen 8.92%, outpacing both the Computer and Technology sector and the S&P 500. Analysts currently expect KLA to report quarterly EPS of $8.75 and revenue of $3.24 billion, both up mid‑single digits year over year, with full‑year estimates pointing to earnings of $35.44 per share on $13.04 billion in revenue. The Zacks Consensus EPS estimate has inched 0.1% higher in the last month, and KLA holds a Zacks Rank of #2 (Buy). The stock trades at a forward P/E of 35.57 and a PEG ratio of 3.36, above its industry averages, indicating a valuation premium. Lam Research closed down 1.19% at $173.78 after trading as low as $173.59, with volume roughly half its average. The stock has still gained 13.62% over the past month. Consensus forecasts call for quarterly EPS of $1.15 and revenue of $5.22 billion, both showing double‑digit growth from a year earlier, and full‑year EPS of $4.79 on $21.04 billion in revenue. Zacks data show a slight 0.05% uptick in Lam’s EPS estimate over the past month and a Zacks Rank of #2 (Buy). Lam’s forward P/E of 36.72 and PEG ratio of 2.03 are roughly in line with industry levels.

Export licenses and Fed outlook add to year-end uncertainty

The China domestic-sourcing push is unfolding alongside evolving U.S. export rules. Reuters reported that the United States has granted annual 2026 licenses for Samsung Electronics and SK Hynix to bring chipmaking equipment into their China facilities, replacing broader waivers that expire on December 31. After that date, American tool shipments to certain factories will require export licenses, keeping policy risk elevated for U.S. and Japanese equipment makers. Trading conditions were thin ahead of year‑end, with the Dow, S&P 500 and Nasdaq all modestly lower as investors awaited minutes from the Federal Reserve’s December meeting for clues on the 2026 interest‑rate path. Market strategists cited recent weakness in large technology names as part of a broader repositioning rather than a panic-driven sell‑off. For semiconductor equipment suppliers, the combination of China’s procurement rules, shifting U.S. licensing requirements and rate-sensitive valuations leaves the group highly responsive to policy headlines. Investors are now focused on upcoming earnings reports in early 2026 from Applied Materials, KLA and Lam Research for updated commentary on China demand, export-control exposure and the durability of capital spending plans into next year.

Key Takeaways

China’s 50% domestic-equipment requirement introduces a structural headwind for foreign chip-tool makers, affecting not just near-term sales but visibility into 2026 orders.
Applied Materials, KLA and Lam Research remain profitable with rising earnings estimates, yet their share prices are increasingly sensitive to policy shifts in both Beijing and Washington.
Valuation gaps are emerging: KLA and Lam trade at premiums to industry averages, while Applied trades at a discount, shaping how investors may balance growth expectations against geopolitical risk.