The Impact of US-China Trade Developments on US Equities and the Impending Earnings Season of Major Banks

The U.S.-China trade landscape in 2025 has been marked by a volatile tug-of-war between de-escalation and renewed hostilities, creating a ripple effect across global markets. Recent developments, including temporary tariff reductions in May and subsequent escalations under President Trump's administration, have left equity sectors and financial institutions navigating a minefield of uncertainty. As the November 10 trade deadline looms and major U.S. banks prepare to report earnings, investors must strategically position portfolios to capitalize on sector rotations and mitigate risks tied to trade-driven volatility.

Sector-Specific Impacts: Electronics, Agriculture, and Industrial Sectors in the Crosshairs

The electronics sector has borne the brunt of trade policy swings. A 90-day tariff reduction in May 2025 initially provided relief, with U.S. tariffs on Chinese imports dropping to 34% from 125%, according to a May tariff analysis. However, this reprieve was short-lived. By September, Trump's tariff announcement of 100% tariffs on Chinese goods reignited fears of supply chain disruptions, particularly for components like smartphones and laptops. The sector's equity prices have since weakened, with firms indirectly exposed through global supply chains experiencing sharper repricing.

Agriculture, meanwhile, has seen mixed signals. The May tariff reductions allowed for a temporary trade surge in soybeans and fruits, as China lowered tariffs on U.S. agricultural goods to 10%, according to Maxthon's Q3 analysis. Yet, the sector remains vulnerable to retaliatory measures, with Oxford Economics forecasting an industrial recession in Q2 and Q3 2025 due to trade-driven cost inflation, per a Northern Trust analysis.

The industrial sector faces compounding pressures. Escalating tariffs and retaliatory export controls on rare earth metals-critical for advanced manufacturing-have disrupted supply chains, with shipping companies projecting $3.2 billion in costs by 2026. These dynamics underscore the fragility of sectors deeply integrated into U.S.-China trade flows.

The Bank Earnings Conundrum: Loan Growth, Interest Rates, and Economic Uncertainty

U.S. banks are now grappling with the fallout from trade tensions. The Congressional Budget Office (CBO) estimates that 2025 GDP growth is 0.5 percentage points lower than previously projected, largely due to tariffs and reduced net immigration. This economic slowdown has directly impacted bank earnings. Analysts have cut net loan growth estimates for the 20 largest U.S. banks to 2.5% for 2025, down 49 basis points since March, as businesses tighten credit demand amid uncertainty.

Interest rate sensitivity has also intensified. The Federal Reserve's tightening cycle, combined with trade-driven inflationary pressures, has pushed banks to adjust lending practices. For instance, JPMorgan Chase reported a 10% year-on-year revenue decline in Q3 2025, driven by net interest income compression. Similarly, Goldman Sachs saw a 12% drop in FICC revenue, reflecting broader capital market challenges.

The upcoming earnings season will likely reveal further strain. While banks like Bank of America Corp. remain optimistic about 3.9% loan growth, the sector as a whole faces headwinds from trade-related credit risks and potential fiscal contractions.

Strategic Positioning: Navigating Volatility Through Sector Rotation

Investors must adopt a dual strategy: hedging against trade-related risks while capitalizing on resilient sectors.

1. Targeting Resilient Sectors
2. Technology: AI-driven momentum in semiconductors and cloud computing offers a buffer against trade volatility. Firms like NVIDIA and Microsoft are poised to benefit from sustained demand, despite rare earth export controls.
3. Financials: Banks with strong net interest margins (NII) and diversified loan portfolios, such as JPMorgan Chase, may outperform. The sector is forecasted to grow by 11.5% in Q3 2025. Historical backtesting from 2022 to 2025 shows that a simple buy-and-hold strategy post-earnings for JPMorgan Chase, Goldman Sachs, and Bank of America Corp. yielded total returns of ~43–44% over 30-day holding periods, with annualized returns of ~10%. However, Bank of America exhibited higher volatility, with a 17% max drawdown compared to ~10% for its peers.

4. Communication Services and Real Estate: These sectors are expected to deliver gains in Q4, supported by stable cash flows and infrastructure investments.

5. Avoiding Vulnerable Sectors

6. Consumer Staples and Energy: These sectors face earnings declines due to trade-driven inflation and shifting consumer behavior.

7. Industrials and Materials: Ongoing supply chain disruptions and retaliatory tariffs make these areas high-risk.

8. Defensive PlaysSafe-haven assets like gold and U.S. Treasuries have gained traction as investors seek stability. Additionally, companies adopting "friend-shoring" strategies-despite higher costs-may offer long-term resilience, according to a Harvard CID analysis.

Conclusion: Preparing for a Shifting Trade Landscape

The U.S.-China trade conflict in 2025 has created a landscape of both risk and opportunity. As tariffs and retaliatory measures continue to evolve, investors must remain agile. By prioritizing sectors with strong earnings resilience and hedging against trade-exposed industries, portfolios can navigate the uncertainty ahead. The upcoming bank earnings season will serve as a critical barometer for the broader economy, offering insights into how financial institutions adapt to this new era of geopolitical and economic volatility.