Sector Divergence and Selective Opportunities in U.S. Industrials: Navigating the Trade Truce Landscape

The temporary 90-day tariff truce between the U.S. and China, announced on May 12, 2025, has reignited hopes for a U.S. industrial resurgence. However, the recovery is far from uniform. While aerospace and defense giants like Boeing (BA) and Lockheed Martin (LMT) stand to gain from supply chain relief, automakers such as Honda (HMC) and Nissan (NSANY) face lingering headwinds. This divergence creates a high-reward, high-risk landscape where investors must prioritize strategic bets on trade truce beneficiaries while avoiding overvalued cyclicals that assume a full economic rebound.

Aerospace & Defense: Flying High on Tariff Relief

The aerospace and defense sectors are prime beneficiaries of the tariff pause. The U.S. cut tariffs on Chinese imports from 145% to 30%, easing pressure on critical supply chains. For Boeing, which relies on Chinese rare earth minerals for jet engines and avionics, this reduces costs for intermediate components. Similarly, Lockheed Martin’s advanced defense systems—dependent on materials like neodymium for precision guidance—gain access to cheaper inputs.

Why it matters: Yale Budget Lab analysis shows U.S. manufacturing output (including aerospace) rose 1.5% long-term due to reshored production, despite prior tariff volatility. Defense contractors also benefit from geopolitical tensions: the truce’s fragility ensures Pentagon spending remains elevated to secure supply chain resilience.

Automotive: Stuck in Neutral

The automotive sector faces a bleaker outlook. The 25% U.S. tariff on imported vehicles and parts—excluded from the truce—remains in force. For Honda and Nissan, which source engines and electronics from Asia, this means $11,000 in tariffs per $40,000 vehicle, inflating costs. Japan’s Nikkei reported that Toyota and Honda issued earnings warnings in May, citing “unabated tariff risks” and disrupted supply chains.

The ripple effect: Higher costs force automakers to either absorb margins or pass them to consumers, squeezing demand. S&P Global Mobility forecasts a 700,000-unit drop in U.S. auto sales in 2025, with EVs disproportionately affected due to China’s rare earth export controls.

Case Study: Japan’s Tariff-Driven Earnings Warnings

Japan’s industrial sector provides a cautionary tale. Toyota’s May 2025 warning cited 40% declines in trans-Pacific cargo volumes due to tariff uncertainty, while Honda’s Q2 2025 earnings missed estimates by 15%. This underscores the geographic vulnerability of automakers reliant on Asian supply chains. In contrast, U.S. defense stocks like Raytheon (RTX) rose 12% post-truce, reflecting investor confidence in their tariff-insulated business models.

Investment Strategy: Prioritize Trade Leverage, Avoid Overvaluation

1. Buy aerospace/defense with supply chain resilience:
2. Boeing (BA) and Lockheed Martin (LMT) benefit from reduced input costs and U.S. military spending.

3. Target companies with critical mineral diversification (e.g., Raytheon’s partnerships with U.S. rare earth miners).

4. Avoid automakers without cost-mitigation plans:

5. Honda (HMC) and Nissan (NSANY) face pricing pressures unless they accelerate U.S. production or secure tariff exemptions.

6. Short sellers should focus on automakers with high tariff exposure ratios (tariffs-to-revenue).

7. Beware overvalued cyclicals:

8. The S&P 500 Industrial Sector’s 15% rally may have priced in a full recovery. Sector multiples are now above their 5-year average, yet risks like a post-truce tariff re-escalation remain.

Conclusion: Act Fast, but Stay Disciplined

The U.S.-China truce is a 90-day window of opportunity, not a permanent fix. Investors should act swiftly to lock in gains from aerospace/defense exposure while avoiding cyclicals that overreach on recovery assumptions. The stakes are high: a failed truce could send automakers into a liquidity crisis, while defense stocks would pivot to domestic production and geopolitical contracts.

The path forward is clear: diverge from the crowd, focus on trade-sensitive winners, and brace for volatility. The industrial sector’s rebound will favor the bold—but only those who read the tariff map correctly.