Equity Markets Find Stability as Geopolitical Risks Ease: Strategic Sectors to Watch

The fragile Israel-Iran ceasefire and emerging U.S.-China trade optimism have injected a rare sense of stability into global markets, sparking a rally in equities. Investors now face a critical question: Which sectors stand to benefit most from reduced geopolitical risk and improved cross-border trade?

The answer lies in strategic allocations to industries tied to energy security, tech supply chains, and manufacturing resilience. Below, we analyze the opportunities and risks, supported by key data points and sector-specific insights.

1. Energy Sector: Middle East Stability Boosts Oil Markets

The Israel-Iran ceasefire has reduced immediate risks of a military escalation that could block the Strait of Hormuz—a chokepoint for 20-25% of global oil traffic. This stability has already eased crude price volatility, though geopolitical tensions remain a wildcard.

Why invest here?
- Reduced disruption risks for energy infrastructure.
- Lower geopolitical premiums in oil pricing could benefit consumers and energy sector profitability.

Top picks:
- XLE (Energy Select Sector SPDR Fund): Tracks major U.S. energy companies like ExxonMobil (XOM) and Chevron (CVX), which benefit from stable oil demand and reduced supply shocks.
- PBF Energy (PBF): A refining-focused company that thrives in predictable price environments.

Risk alert: While short-term stability is positive, Iran's nuclear ambitions and unresolved IAEA monitoring remain long-term concerns.

2. Technology & Semiconductors: Trade Deals Unshackle Supply Chains

The U.S.-China agreement to ease rare earth export controls and reduce tariffs has removed a major bottleneck for tech manufacturers. Rare earth metals—critical for semiconductors, EV batteries, and defense systems—are now flowing more freely from China, lowering production costs.

Why invest here?
- Lower input costs: Companies like Intel (INTC) and NVIDIA (NVDA) can now source rare earth materials without delays, accelerating product cycles.
- EV sector tailwinds: Carmakers like Tesla (TSLA) and BYD (BYD) depend on stable rare earth supplies for batteries.

Top picks:
- SMH (VanEck Vectors Semiconductor ETF): Tracks companies exposed to the semiconductor boom.
- ASML (ASML): A Dutch firm critical to chip manufacturing, benefiting from U.S.-China trade normalization.

Caveat: The deal's sustainability hinges on China's compliance with IAEA inspections and U.S. willingness to lift broader tech sanctions.

3. Industrials & Manufacturing: Trade Optimism Sparks Capex Revival

Reduced trade tensions have reignited capital expenditure (capex) plans in manufacturing. U.S. firms like Caterpillar (CAT) and Deere (DE) rely on Chinese steel and components, while European industrial giants such as Siemens (SIE) gain from stable trans-Pacific supply chains.

Why invest here?
- Lower input costs: Reduced tariffs on raw materials improve margins.
- Global retooling: Companies are upgrading factories to meet post-pandemic demand, supported by improved trade access.

Top picks:
- IY (iShares U.S. Industrials ETF): Broad exposure to industrial leaders.
- Danaher (DHR): A diversified industrial firm with exposure to life sciences and infrastructure.

Risk alert: China's economy faces headwinds, including a 9% drop in factory profits in May 2025, which could dampen demand for industrial goods.

4. Risks to Watch

• Ceasefire fragility: Analysts warn that without a binding Iran nuclear deal, the truce could unravel. Monitor Iran's IAEA cooperation and drone attacks.
• Trade deal durability: U.S.-China agreements often face setbacks (e.g., fentanyl disputes, tech sanctions). Stay wary of tariff renegotiations.

Investment Strategy: A Balanced Approach

• Overweight energy and industrials: These sectors are directly tied to reduced supply chain risks.
• Underweight defense: Reduced military tensions may limit spending on weapons systems.
• Use ETFs for diversification: Sector ETFs like XLE and SMH offer broad exposure with lower stock-specific risk.

Final note: While the geopolitical pause offers a buying opportunity, investors should remain nimble. Geopolitical equilibriums are fragile; keep an eye on Middle East missile tests and U.S.-China diplomatic cables.

Nick Timiraos
June 19, 2025