Navigating Trade Tensions: Where to Bet in U.S. Equities and Bonds

The U.S. economy is at a crossroads. Tariff-driven inflation is accelerating, trade tensions are escalating, and mixed bank earnings are testing investor confidence. Yet within this turmoil lies an opportunity for strategic investors to position themselves for gains in tech, rate-sensitive sectors, and safe havens while avoiding overexposure to trade-exposed industries. Here's how to navigate this complex landscape.

The Inflation Tariff: A Lagging but Looming Threat

Recent data shows the U.S. inflation rate rising to 2.7% year-over-year in June 2025, with core CPI climbing to 2.9%—a clear sign that tariffs are starting to bite. Key sectors like apparel (+0.4%), footwear (+0.7%), and furniture (+0.4%) are feeling the pinch as businesses pass on tariff costs. However, the full impact remains delayed, with analysts warning of a staggered inflation wave as tariffs on 20+ countries—including 35% levies on Canadian goods—take effect.

The Federal Reserve is caught in a dilemma: markets expect a 50-basis-point rate cut by September, but the central bank remains cautious. Why? Because inflation could spike further if trade tensions escalate, while a prolonged standoff risks a recession. The Fed's next move hinges on whether tariff-driven inflation proves transitory (as banks' Q2 earnings suggest) or persistent.

Big Banks: Resilient, but Not Unscathed

Q2 2025 earnings from major banks like JPMorgan, Goldman Sachs, and Citigroup reveal a sector navigating choppy waters with surprising resilience. Trading divisions thrived amid market volatility fueled by geopolitical uncertainty, while disciplined cost management and rising interest rates bolstered net interest margins.

Historically, stocks with positive earnings surprises have delivered an average 0.15% jump on the day of the report, per backtests since 2022, with over 24,773 such events reinforcing the market's bias toward outperforming companies. This data underscores the value of focusing on firms that beat expectations—a trait common among the resilient banks highlighted here.

However, risks lurk beneath the surface. Tariff uncertainty has dampened corporate investment and consumer spending, slowing loan growth. Delinquency rates remain low for now, but if GDP growth slips below 1.5%, credit quality could deteriorate. Investors should prioritize banks with diversified revenue streams (e.g., BNY Mellon's global expansion) and strong capital ratios.

Sector Opportunities: Tech, Rates, and Safe Havens

1. Tech: The Tariff-Proof Play
   AI-driven companies like Nvidia (+45% YTD 2025) are insulated from trade wars and poised to benefit from Fed rate cuts. Their growth is fueled by enterprise spending on automation and cloud infrastructure, sectors less exposed to tariffs.

Action: Overweight semiconductor and AI software stocks.

1. Rate-Sensitive Sectors: Betting on Fed Cuts
   Utilities and real estate—both rate-sensitive—are primed for gains if the Fed delivers rate cuts. The 10-year Treasury yield has already fallen to 4.3% as markets price in easing.

Action: Buy high-quality REITs (e.g., Prologis) and utility stocks with dividend yields above 3%.

1. Safe Havens: Gold and Treasuries
   Geopolitical risks—from Russia-Ukraine tensions to China-U.S. trade disputes—make gold and short-term Treasuries essential portfolio ballast.

Action: Allocate 5-10% to gold ETFs (e.g., GLD) and ultra-short Treasury funds.

Sectors to Avoid: Trade-Exposed Industries

Industries like industrials (airlines, machinery) and consumer discretionary (apparel, furniture) face headwinds. Tariffs on steel, aluminum, and finished goods have already hiked production costs, squeezing margins.

Avoid: Overweighting companies reliant on global supply chains, such as automotive or semiconductor manufacturers with heavy Chinese exposure.

The Fed's Tightrope: Rate Cuts or Rate Pause?

The Fed's next move will hinge on two factors:
1. Inflation Trends: If core CPI stays below 3%, a September cut is likely. A surge above 3.5% could delay easing.
2. Bank Earnings Signals: Strong loan growth and stable credit metrics in Q2 reports will embolden the Fed to act.

Investors should monitor the Fed's July 28 policy statement for clues. A dovish tilt could send equities soaring, while a hawkish surprise would trigger a rotation into defensive stocks.

Final Take: Balance Growth and Safety

The path forward is clear:
- Growth: Tech, AI, and rate-sensitive sectors offer asymmetric upside.
- Safety: Treasuries and gold hedge against geopolitical shocks.
- Avoid: Trade-exposed industries until tariff clouds lift.

The Fed's calculus remains the key variable. Stay agile—position for Fed cuts, but keep a wary eye on inflation. This is no time to be all-in, but a strategic portfolio can thrive in the storm.