US-China Trade Truce and the Sky-High Performance of Aerospace and Defense Stocks

The U.S.-China trade war, long a source of volatility for global markets, has entered a new phase in 2025. After years of tit-for-tat tariffs that spiked to 145% on Chinese goods in the U.S. and 125% in the reverse direction, a May 2025 agreement has slashed these rates to 30% and 10%, respectivelyTrump’s 2025 Tariffs and the Aerospace & Defense Sector: Navigating Supply Chain Strain and Strategic Adjustments^[2]. This truce, while temporary, has created a ripple effect across industries, particularly aerospace and defense—sectors that have historically been both casualties and beneficiaries of trade policy shifts.

Tariff Relief and Sectoral Resilience

The immediate beneficiaries of the trade pause are companies reliant on cross-border supply chains for critical components. In aviation, tariffs on steel, aluminum, and aircraft parts had driven up production costs, squeezing margins for manufacturers like Boeing and AirbusThe Impact of US Tariffs on Global Aviation - airwaysmag.com^[4]. The reduction in tariffs has eased some of this pressure, allowing for more predictable pricing and supply chain stability. For example, U.S. maintenance and repair operations, which previously faced 25% tariffs on Canadian and Mexican-sourced aircraft parts, now operate in a less punitive environmentThe Impact of US Tariffs on Global Aviation - airwaysmag.com^[4].

In defense, the impact is equally pronounced. Tariffs on advanced materials like carbon fiber and rare-earth minerals—key inputs for lightweight aircraft and precision-guided systems—had forced companies like Lockheed Martin and Raytheon to diversify supply chains into India and the EUTrump’s 2025 Tariffs and the Aerospace & Defense Sector: Navigating Supply Chain Strain and Strategic Adjustments^[2]. With the U.S. agreeing to ease export controls on ethane and jet engines, and China committing to expedite rare-earth exports, the sector is seeing a thaw in access to critical resourcesBeijing.Forum - US-China Trade Agreements: From Announcements to Signed Deals^[5].

Stock Market Outperformance: A Tale of Two Sectors

The aerospace and defense sector has surged in 2025, with the S&P Aerospace & Defense Select Industry Index up 44% year-to-date, far outpacing the S&P 500's 10.3% returnAerospace and defense stocks could surge to close 2025^[1]. This outperformance is driven by two forces: the trade truce and a historic $156.2 billion defense spending boost under the "One Big Beautiful Bill Act" (OBBB)Aerospace and defense stocks could surge to close 2025^[6].

Defense contractors are reaping the rewards of this spending spree. Honeywell Aerospace, Leidos, and Kratos have reported record backlogs, while Boeing and Hexcel are benefiting from a rebound in commercial aviation demandAerospace and defense stocks could surge to close 2025^[6]. The iShares U.S. Aerospace & Defense ETF (ITA) has surged 25% in the first half of 2025, outperforming tech-heavy benchmarks like the Invesco QQQ TrustDefense Stocks Outperform Tech With Trump Budget Boost^[3]. Even individual stocks like General Electric (up 50.59% YTD) and RTX Corporation (up 37%) reflect the sector's momentumDefense Stocks Outperform Tech With Trump Budget Boost^[3].

Risks and Realities

Despite the optimism, challenges linger. The trade truce is a 90-day pause, not a permanent resolution, and unresolved issues like China's industrial policies and U.S. concerns over intellectual property remain unaddressedDefense Stocks Outperform Tech With Trump Budget Boost^[3]. Meanwhile, supply chain bottlenecks—such as labor shortages and raw material price swings—continue to constrain production for top aerospace and defense firmsTrump’s 2025 Tariffs and the Aerospace & Defense Sector: Navigating Supply Chain Strain and Strategic Adjustments^[2].

Moreover, the sector's valuation has stretched. While long-term government contracts provide stability, investors must weigh the risk of overvaluation against potential headwinds like inflation or a shift in global defense prioritiesAerospace and defense stocks could surge to close 2025^[6]. As one PwC report notes, "The industry's growth is outpacing its ability to scale," with top 100 aerospace and defense companies reporting $922 billion in revenue in 2024 but struggling to meet surging demandTrump’s 2025 Tariffs and the Aerospace & Defense Sector: Navigating Supply Chain Strain and Strategic Adjustments^[2].

Conclusion: A Strategic Bet Amid Uncertainty

For investors, the aerospace and defense sector offers a compelling mix of near-term tailwinds and long-term strategic value. The U.S.-China trade truce has provided a temporary reprieve, but the sector's outperformance is also fueled by structural factors: geopolitical tensions, technological innovation, and a global defense spending boom.

However, as with any high-conviction trade, caution is warranted. The truce's durability, the pace of supply chain adjustments, and macroeconomic shifts will all shape the sector's trajectory. For now, though, the skies seem clear—and the stocks are flying.