Navigating Geoeconomic Risk in the U.S. Stock Market

Domestic U.S. stocks expose investors to geoeconomic risk through firms' global supply-chain relationships, which can be impacted by foreign policy shocks. Exposure is embedded when U.S. firms sell to overseas customers or rely on global supply chains, meaning geopolitical events can transmit risk to domestic portfolios. This risk is traced through U.S. export controls imposed by the Bureau of Industry and Security, which restrict sales of certain technologies to specific foreign entities, interpreted as a manifestation of geoeconomic risk for U.S. suppliers. Investors are compensated for bearing this risk through higher risk premia.
The study tracked Chinese entities added to U.S. export-control lists and matched the affected U.S. suppliers to holdings in domestic equity mutual funds from 2010 to 2023. Exposure within domestic funds varied significantly by investment style; for example, science and technology funds invested 43.3 percent of their portfolios in domestic firms connected to Chinese customers. Following export control announcements targeting Chinese customers, U.S. suppliers experienced a cumulative abnormal stock return of −3.6 percent immediately after the announcement. Active fund managers responded by selling affected suppliers, suggesting they incorporate these risks into portfolio adjustments. Passive funds experienced a 31-basis-point decline in monthly returns following an exposure increase, whereas active funds experienced a 22-basis-point decline.

* Domestic U.S. stocks expose investors to geoeconomic risk via firms' global supply-chain relationships.
* Foreign policy shocks can reduce the value of U.S.-listed firms and transmit geoeconomic risk to domestic portfolios.
* Export controls restrict U.S. firms from selling certain technologies to specific foreign entities deemed a security risk.
* The addition of a foreign firm to an export control list is interpreted as geoeconomic risk for its U.S. suppliers.
* Data linked Chinese entities on U.S. export-control lists to their U.S. suppliers using supply-chain data.
* The analysis matched affected U.S. suppliers to holdings in U.S. domestic equity mutual funds (2010–2023).
* Science and technology funds invested 43.3 percent of their portfolios in domestic firms connected to Chinese customers.
* U.S. suppliers experienced a cumulative abnormal stock return of −3.6 percent after export control announcements targeting Chinese customers.
* Funds holding stocks of affected U.S. suppliers experienced higher volatility and lower returns following export controls.
* Active managers reduced holdings of affected U.S. suppliers and sold other China-linked firms post-announcement.
* Passive funds experienced a 31-basis-point decline in monthly returns for a one standard deviation increase in exposure, compared to 22 basis points for active funds.

The core tension in this analysis lies between the structural reality of globalized supply chains and the perceived insulation afforded by domestic asset allocation. The finding that geoeconomic shocks transmit risk across multiple domestic stocks via common foreign exposures suggests that traditional diversification methods may be insufficient when policy risks are globally embedded. The pattern observed where active managers engage in selling, even three months post-shock, suggests an institutional acknowledgment that these risks are not purely transitory or idiosyncratic; they are structural and should influence valuation.
The differential response between fund types—where growth and technology funds show higher exposure to Chinese customers, and subsequently face greater negative returns—highlights that portfolio structure dictates vulnerability. This moves the discussion from simple risk measurement to risk mapping across interconnected economic dependencies. The counterintuitive finding that active managers mitigate losses but introduce concentrated risk suggests a behavioral element: managers respond to performance shortfalls by adopting riskier positions, reinforcing the idea that managing geoeconomic risk is less about static allocation and more about dynamic, adaptive positioning within complex supply-chain realities.
The implication for cognitive sovereignty is recognizing that portfolio risk is not solely determined by geography (where stocks are listed) but by the flow of economic activity (where revenues originate). The need to map policy shocks onto global value chains underscores a critical gap: current financial models may fail to adequately price risks stemming from sovereign geopolitical choices woven into corporate operations. The subsequent demand for compensation, demonstrated by abnormal returns, suggests that while these links exist, the market is slowly integrating this dimension into pricing, though the behavioral response indicates that full assimilation remains an ongoing challenge dependent on managerial discretion and information flow.