U.S. Equity Opportunities in a Post-Trade Truce Era: Sector Rotation Strategies and Fed Policy Shifts

The U.S.-China trade truce announced on May 12, 2025, has fundamentally altered the investment landscape, reshaping growth forecasts and Federal Reserve policy expectations. With tariffs slashed to 10%—marking a 90-day pause in the tariff war—markets now face a recalibrated risk environment. For investors, this presents a pivotal moment to pivot toward cyclical sectors poised to benefit from reduced recession fears and delayed rate cuts, while remaining vigilant to lingering Eurozone vulnerabilities.

The Truce’s Impact on Growth and Fed Policy

The trade truce has all but erased near-term recession risks, as evidenced by the Federal Reserve’s abrupt pivot away from rate cuts. Prior to the deal, markets priced in a 60% chance of a July 2025 rate reduction. Now, Barclays analysts project the Fed will hold rates steady through year-end, citing stabilized growth and inflation hovering at 2.3%—above the 2% target but no longer escalating.

This shift has emboldened sector rotation strategies. Goldman Sachs recently upgraded its S&P 500 year-end target to 5,000 from 4,800, driven by improved earnings visibility and reduced supply-chain disruptions. Meanwhile, Barclays revised U.S. GDP growth upward to 1.8% for . The truce’s removal of a key tailwind for defensive sectors—like utilities and healthcare—creates opportunities in cyclical plays.

Cyclical Sectors: The New Growth Engines

1. Industrials (IY): Reduced tariffs and supply-chain normalization are catalysts for industrial firms reliant on cross-border trade. Companies like Boeing (BA) and Caterpillar (CAT)—both tied to China’s infrastructure spending—could see margin improvements.
2. Key Catalyst: China’s $1.5 trillion annual infrastructure budget, with 30% allocated to U.S. equipment suppliers under the truce.

3. Risk: Persistent 20% U.S. tariffs on fentanyl-related goods could limit upside in select subsectors.

4. Technology (XLK): The truce eases pressure on tech giants exposed to China’s market access and supply chains. NVIDIA (NVDA) and AMD (AMD), for instance, benefit from Middle East AI investments now unfettered by tariff volatility.

5. Key Catalyst: J.P. Morgan estimates a 12% revenue boost for U.S. chipmakers from China’s rare earth export restrictions being suspended.

6. Risk: Ongoing U.S. curbs on semiconductor exports to China may cap upside.

7. Financials (XLF): Delayed rate cuts favor banks, as lingering higher-for-longer rates bolster net interest margins. JPMorgan (JPM) and Bank of America (BAC) are prime beneficiaries.

8. Key Catalyst: Barclays projects a 7% increase in banking sector ROE by 2026 if rates stay above 5.0%.

Eurozone Risks: The Cloud on the Horizon

While U.S. markets rally, Eurozone fragility remains a wildcard. The European Central Bank’s 3.75% terminal rate—among the highest in decades—has pushed German bund yields to record highs, squeezing periphery nations like Italy and Spain. A highlights the divergence. Investors should avoid U.S. multinationals with heavy Eurozone exposure, such as Coca-Cola (KO) or 3M (MMM), until European debt stability is assured.

The Case for Aggressive Equity Allocation

The trade truce has created a “Goldilocks” scenario for U.S. equities: growth is strong enough to avoid recession, but not so hot as to force rate hikes. This favors a 70-30 equity-bond split, with a focus on cyclical sectors. Key actionable steps:
- Rotate out of defensives: Utilities (XLU) and healthcare (XLV) have lost 2.5% YTD, underperforming the S&P 500 by 500 basis points.
- Overweight industrials and tech: Allocate 30% of portfolios to industrial and tech ETFs, targeting names with China exposure and strong balance sheets.
- Hedged Eurozone exposure: Use currency-hedged ETFs like FEZ or regional shorts to mitigate European contagion risks.

Conclusion: Act Now—Before the Truce’s Fragility Bites

The post-trade truce era offers a fleeting window to capitalize on U.S. growth resilience. With Goldman’s S&P 500 target now within reach and Barclays’ growth upgrades validated, investors ignoring cyclical sectors risk missing the next leg of this bull market. However, the 90-day truce’s expiration in August 2025 looms as a critical juncture. Act swiftly—allocate to industrials, tech, and financials—before the Fed’s next pivot or a new round of trade disputes alters the calculus.

The path to outperformance is clear. The question is: will you seize it?

This analysis is for informational purposes only. Investors should conduct their own due diligence and consult a financial advisor.