**Navigating Divergence: Sector Rotation in a Fractured Q2 Earnings Landscape**

The U.S. corporate profit landscape in Q2 2025 revealed a stark divergence between sectors, with consumer staples clinging to defensive resilience and aerospace/defense surging on the back of geopolitical tailwinds and capital-intensive contracts. This divergence presents a critical inflection point for tactical sector rotation, particularly as macroeconomic signals—such as the U-6 unemployment rate rising to 8.3%—hint at a softening labor market and shifting capital allocation priorities.

Consumer Staples: The Sustained Defense

The consumer staples sector, long a haven for risk-averse investors, demonstrated its hallmark stability in Q2. Of 12 major companies reporting earnings, 10 exceeded expectations, with Procter & Gamble (PG), Colgate-Palmolive (CL), and Kimberly-Clark (KMB) leading the charge. Despite a 4% drop in P&G's operating profit due to insurance underwriting declines, its strategic pivot to premiumization and emerging markets reinforced its low-volatility profile. Similarly, Colgate's sequential sales growth in Asia and Latin America, coupled with cost-cutting measures, offset flat year-on-year performance.

However, cracks are emerging. USANA Health Sciences (USNA) and Cal-Maine Foods (CALM) outperformed with 10.9% and 72.2% revenue growth, respectively, while Conagra Brands (CAG) stumbled with a 4.3% revenue decline. The sector's reliance on inelastic demand is being tested by disinflationary pressures and shifting trade policies. For instance, the One Big Beautiful Bill (OBBB)—a legislative package extending tax cuts and reshaping Medicaid—has introduced uncertainty around pricing power and profit margins.

Aerospace/Defense: The Geopolitical Tailwind

In stark contrast, the aerospace/defense sector is riding a wave of momentum fueled by defense spending and geopolitical tensions. RTX Corporation (RTX) reported $21.6 billion in Q2 sales, a 9% year-over-year increase, driven by robust commercial aftermarket demand and defense contracts. Its adjusted EPS of $1.56 (up 11%) and a $236 billion backlog underscore its strategic positioning in a world increasingly prioritizing national security.

Lockheed Martin (LMT), however, faced headwinds, with $1.6 billion in program losses on classified and international contracts dragging its net earnings to $1.46 per share from $6.85 in Q2 2024. Yet, its reaffirmed 2025 guidance and $1.3 billion in shareholder returns highlight the sector's long-term durability. The U.S. government's focus on modernizing military capabilities—evidenced by new awards for F-35 production and missile defense systems—suggests this tailwind will persist.

The Strategic Implications for Investors

The earnings divergence between these sectors offers a roadmap for tactical rotation. Consumer staples, while still defensive, face margin compression from disinflation and regulatory shifts. Aerospace/defense, conversely, benefits from structural demand and capital-intensive projects that insulate it from cyclical downturns.

1. Portfolio Positioning:
2. Underweight Consumer Staples: Allocate defensively but monitor for margin erosion. Prioritize companies with premium pricing power (e.g., P&G) over those reliant on volume growth (e.g., Conagra).

3. Overweight Aerospace/Defense: Favor firms with long-term government contracts and diversified backlogs (e.g., RTX, Northrop Grumman). Avoid those with high exposure to single programs (e.g., Lockheed Martin's classified losses).

4. Risk Management:

5. Hedge against trade policy risks by balancing exposure to global aerospace players (e.g., RTX's international defense contracts) with domestic consumer staples.

6. Use the U-6 unemployment rate as a proxy for consumer staples' demand resilience. A rise above 9% could signal underperformance.

7. Macro Signals to Watch:

8. Federal Reserve Policy: A pause in rate cuts could extend the life of consumer staples' defensive appeal.
9. Defense Budget Allocations: The 2026 National Defense Authorization Act (NDAA) will likely dictate aerospace/defense's trajectory.

Conclusion: The New Sector Rotation Playbook

As the U.S. economy navigates a potential soft landing, sector rotation must evolve from a binary “growth vs. value” framework to a nuanced analysis of structural tailwinds and macroeconomic triggers. Consumer staples remain a cornerstone for stability, but their margins are under siege. Aerospace/defense, meanwhile, is a high-conviction play for investors willing to bet on a world where geopolitical tensions and technological modernization drive capital allocation.

For tactical investors, the key lies in balancing these divergent forces: holding a core of defensive staples while leaning into the momentum of defense stocks. The Q2 2025 earnings season has laid the groundwork for this strategy, and the coming quarters will test its mettle.