Positioning for a Tariff-Resilient Rally: How Equities Can Weather Trade Tensions

The U.S. jobs report for May 2025 underscored a labor market holding steady amid escalating trade tensions, with nonfarm payrolls rising by 139,000 and average hourly earnings climbing 3.9% annually. While these figures eased immediate recession fears, the Federal Reserve's reluctance to cut rates—despite political pressure—has investors weighing whether equities can sustain momentum amid unresolved trade disputes. With U.S.-China trade talks resuming this month, the path forward hinges on identifying sectors insulated from tariff volatility and leveraging Federal Reserve policy continuity.

The Jobs Report: A Foundation for Resilience

The May jobs data highlighted a labor market with both strengths and vulnerabilities. Healthcare led job creation (+62,000), while leisure and hospitality added 48,000 roles, signaling demand for services that tariffs cannot easily disrupt. . However, the federal government shed 22,000 jobs—part of a broader 59,000 reduction since January—as cost-cutting under the Department of Government Efficiency (DOGE) intensifies.

Crucially, wage growth remained moderate (3.9% annualized), allowing the Fed to maintain a patient stance. Rate futures markets still price in two cuts by year-end, but the central bank's focus on “data-dependent” decisions suggests no abrupt shifts. This stability has supported the S&P 500's rally to near 5,993, with investors prioritizing sectors that can thrive in a low-rate, trade-ambiguous environment.

Trade Talks and the Tariff-Proof Playbook

As U.S.-China negotiations enter a critical phase, the equity market's resilience will depend on isolating sectors less exposed to tariff cycles. Key considerations include:

1. Healthcare and Consumer Services: These sectors, which contributed nearly half of May's job gains, are inherently less susceptible to trade disputes. Healthcare's focus on domestic demand and innovation—think telemedicine or biotech—offers insulation from external shocks. .

2. Tech with Global Supply Chains: Companies like Texas Instruments (TXN) and NVIDIA (NVDA), which have diversified manufacturing bases, are better positioned to navigate tariffs than those reliant on Chinese imports. However, investors should favor firms with pricing power to offset cost increases.

3. Industrials with Domestic Exposure: While manufacturing jobs fell by 8,000 in May, industrials focused on U.S. infrastructure (e.g., Caterpillar's construction equipment) or aerospace (Boeing's defense contracts) may outperform peers tied to export-driven markets.

Risks and the Fed's Role

Despite the positive trajectory, risks loom large. The Congressional Budget Office warns that tariffs could boost inflation by 0.4% annually through 2026, and the jobs report's downward revisions to prior months' payroll data (April's figure was slashed by 30,000) hint at underlying fragility. A breakdown in trade talks could reignite volatility, particularly in sectors like retail and automotive, which have already seen layoffs due to tariff-driven cost pressures.

The Fed's reluctance to cut rates adds another layer of complexity. While low rates support equity valuations, the central bank's emphasis on “controlled cooling” of the labor market—rather than aggressive easing—leaves investors balancing growth optimism against inflationary risks.

Investment Strategy: Rotate to Defensive Growth

To position portfolios for a tariff-resilient rally, consider:
- Overweight healthcare: Stocks like UnitedHealth Group (UNH) and Cigna (CI) benefit from steady demand and limited trade exposure.
- Underweight manufacturing: Avoid industrial firms with heavy reliance on China, such as machinery exporters.
- Leverage Fed-friendly sectors: Consumer discretionary (e.g., McDonald's MCD) and tech with pricing power (e.g., Microsoft MSFT) should outperform in a low-rate environment.

Conclusion: Navigating the Crosscurrents

The May jobs report and Federal Reserve's cautious tone have set the stage for a selective equity rally. Investors should focus on sectors insulated from trade volatility and capable of thriving in a low-rate world. While unresolved trade tensions remain a wildcard, the data-driven resilience of healthcare, services, and domestic industrials suggests a path forward—one that rewards patience and sector-specific insights.

The coming months will test whether equities can sustain momentum as trade talks unfold. For now, the playbook is clear: prioritize stability over speculation.