The Contrarian Play: Finding US Equity Resilience in Tariff-Troubled Sectors

The U.S. labor market's resilience, underscored by the May 2025 jobs report, has created a paradox for investors: while trade tensions and tariffs continue to cloud near-term prospects, sectors hardest hit by these policies now offer compelling contrarian opportunities. Manufacturing and consumer discretionary stocks, hammered by tariff-driven volatility, are trading at discounts that reflect worst-case scenarios rather than the underlying economic strength of the labor market. With the Federal Reserve adopting a wait-and-see stance on rates and trade talks looming, now is the time to position for rebounds in these overlooked sectors.

The Labor Market's Steadfast Foundation

The May jobs report revealed a labor market defying trade-related headwinds. Nonfarm payrolls rose by 139,000, with healthcare (+62,000) and leisure/hospitality (+48,000) leading gains. The unemployment rate held steady at 4.2%, and average hourly earnings rose 3.9% year-over-year—signs of sustained demand and wage growth. Even as federal job cuts (down 22,000 in May) and tariff-induced layoffs (e.g., Passenger Clothing's U.S. shutdown) made headlines, the broader labor market remains robust.

This stability suggests the economy isn't yet in recession territory. The

underscores a key point: companies with global sourcing flexibility or pricing power can navigate tariffs—and their stocks may rebound sharply if trade tensions ease.

Tariff-Impacted Sectors: The Contrarian's Edge

Investors have largely avoided manufacturing and consumer discretionary stocks due to tariff fears. Yet these sectors are now trading at valuation multiples not seen since the 2020 downturn, despite stronger balance sheets and cash reserves.

Manufacturing: A Sector Overdue for Reassessment

The manufacturing sector, particularly in industries like machinery and industrial components, has been collateral damage from trade wars. However, companies with diversified supply chains (e.g., those sourcing materials from multiple countries or investing in U.S. reshoring) are positioned to outperform.

Consider a manufacturer like 3M, which has aggressively diversified suppliers and invested in automation. While its stock has lagged amid trade concerns, its pricing power and exposure to infrastructure spending could drive a rebound. Similarly, Deere, with its strong balance sheet and focus on North American production, offers resilience in an uncertain environment.

Consumer Discretionary: Value in Distressed Names

Consumer discretionary stocks, including apparel and auto parts, have been pummeled by tariffs on imported goods. Yet companies like L Brands (parent of Victoria's Secret) and Gap, which have pivoted to domestic production or renegotiated supplier terms, could see relief if trade barriers ease.

Even automakers like Ford, which face tariffs on imported parts, may benefit from the Fed's patient stance. With the Federal Reserve holding rates steady at 4.25%-4.5%, borrowing costs remain manageable for firms to invest in supply chain diversification.

The Fed's Wait-and-See Signal: A Tailwind for Equities

The Federal Reserve's reluctance to cut rates—even as jobless claims edge higher—reflects its confidence in labor market durability. By pausing rate cuts, the Fed is signaling that the economy isn't yet fragile enough to warrant easing, which supports equity valuations.

This cautious approach also buys time for trade negotiations. The Fed's data-dependent strategy means it won't act until inflation or labor data deteriorate significantly, creating a “safety net” for investors.

Trade Talks: The Catalyst for a Turnaround

Upcoming U.S.-China trade talks in late June 2025 could be the catalyst for sector rebounds. If both sides agree to roll back tariffs on key goods, manufacturing and consumer discretionary stocks could rally sharply. Even a partial deal—such as a tariff reduction on automotive parts or apparel—would reduce costs for companies and alleviate investor fears.

Contrarian Strategy: Targeting Pricing Power and Supply Chain Flexibility

Investors should prioritize companies with two key traits: pricing power (to offset cost increases) and diversified supply chains (to reduce tariff exposure). Examples include:

1. 3M: Strong margins, global supply chain agility, and exposure to infrastructure spending.
2. L Brands: Aggressive localization of production and a focus on high-margin brands.
3. Stanley Black & Decker: Diversified manufacturing with pricing discipline in tools and storage.

Avoid companies overly reliant on a single trade corridor (e.g., Mexico or China) and those with weak balance sheets.

Final Take: The Time to Act Is Now

The May jobs report confirms that the U.S. economy remains fundamentally strong, even as trade tensions linger. Sectors like manufacturing and consumer discretionary are pricing in worst-case scenarios, creating a rare opportunity to buy quality assets at discounts. With the Fed's support and trade talks approaching, now is the time to overweight these sectors in portfolios.

Investors should proceed selectively: focus on companies with the flexibility to adapt and the pricing power to thrive. The next six months could see a sharp rebound—if you're positioned early, the rewards will outweigh the risks.

Investment Grade: Overweight manufacturing and consumer discretionary sectors.
Hold: Tech and financials, which are overvalued and less exposed to trade resolution benefits.
Avoid: Energy and materials, which face headwinds from global demand uncertainty.