Geopolitical Risk and U.S. Equities: Strategic Sector Positioning in a Trade-War Environment

The U.S. trade wars of 2023–2025 have underscored a familiar truth: geopolitical risk is a double-edged sword for equities. While sectors like manufacturing, agriculture, and energy have borne the brunt of tariffs and retaliatory measures, others-such as healthcare, defense, and technology-have demonstrated resilience. This divergence highlights the importance of strategic sector positioning for investors navigating trade-war environments. By analyzing historical performance during the 2018–2019 U.S.-China trade war and current trends, we can identify actionable insights for capital allocation.

Vulnerable Sectors: The Cost of Global Exposure

Trade wars disproportionately harm industries reliant on cross-border supply chains. The automotive sector, for instance, faced a 41,000-job loss due to tariffs on Canadian and Mexican parts, which supply nearly half of U.S. auto components, according to a CEPR column. Similarly, energy prices surged as crude oil imports faced disruptions, while food and beverage industries grappled with higher costs for Mexican produce and Canadian meats, as shown in a CFR analysis. These sectors exemplify the fragility of globalized production models under trade tensions.

Agriculture, too, has been a casualty. Tariffs on Chinese goods led to retaliatory measures against U.S. farm exports, while domestic input costs rose due to duties on machinery and chemicals, according to a PR Newswire report. The result? A 34,000-job decline in wholesale trade and a broader GDP drag, reports a Fortune analysis. For investors, these trends signal caution in sectors where trade exposure is both direct and deep.

Resilient Sectors: Defense, Healthcare, and Tech

In contrast, sectors with inelastic demand, domestic supply chains, or government-backed contracts have fared better. The defense and aerospace industry, for example, outperformed the S&P 500 during the 2018–2019 trade war, delivering a 36.71% annualized return over one year versus the index's 14.56%, per a TopForeignStocks analysis. This resilience stems from stable government spending and the sector's low sensitivity to trade disruptions. As InvestorsObserver research notes, "Defense stocks historically thrive during geopolitical uncertainty due to their essential nature and high barriers to entry."

Healthcare has also proven robust. Despite the S&P 500's 6.2% decline in 2018, the Health Care Select Sector SPDR Fund (XLV) rose 18.4% in 2019, driven by FDA approvals and merger activity, according to a Yahoo Finance review. The sector's inelastic demand-patients need medical care regardless of trade tensions-provides a buffer. However, volatility remains a concern: healthcare stocks exhibited a standard deviation of 48.21 during the trade war, per the FRED tracker.

Technology, while volatile, has shown growth potential. The Technology Select Sector SPDR Fund (XLK) surged 44.3% in 2019, despite periodic corrections tied to trade uncertainty, as noted in the Yahoo Finance review. Yet, its higher beta (greater than 1) and exposure to global supply chains-such as semiconductors and Chinese manufacturing-make it a riskier bet. As data from 2018–2019 shows, tech stocks like AMD and TSLA had standard deviations of 55.10 and 68.28, respectively, underscoring their sensitivity to macroeconomic shifts, according to ABG Analytics data.

Strategic Positioning: Lessons from History

The 2018–2019 trade war offers a blueprint for navigating current tensions. Defense and healthcare stocks, with their stable cash flows and low trade exposure, are natural hedges. For example, aerospace firms leveraged long-term government contracts to offset input cost increases, while healthcare companies relied on essential demand to maintain profitability, as noted by a Govets blog.

Technology, meanwhile, requires a nuanced approach. While the sector's growth potential is undeniable, investors should prioritize firms with diversified supply chains and strong R&D pipelines. As a ScienceDirect study notes, "Firms with higher R&D investment fared relatively better during trade frictions, as their differentiated products allowed for greater resilience."

Conclusion: Balancing Risk and Reward

Geopolitical risk is inevitable, but its impact on equities is not uniform. Sectors like manufacturing and agriculture remain vulnerable, while defense, healthcare, and select technology firms offer resilience. For investors, the key lies in aligning portfolios with these dynamics-prioritizing defensive plays during trade-war escalations and selectively allocating to high-growth tech stocks with mitigated supply chain risks. As history shows, strategic positioning can turn uncertainty into opportunity.