Market Resilience Amid Tariff Hikes and Policy Uncertainty: How Earnings Momentum and Sector Rotation Are Shielding Growth Stocks

The second quarter of 2025 has been a masterclass in market resilience. Despite a backdrop of geopolitical tensions, tariff hikes, and a Federal Reserve that remains cautious on rate cuts, certain sectors and stocks have not only weathered the storm but thrived. The industrial sector, in particular, has emerged as a beacon of stability, driven by strategic sector rotation and earnings momentum that defy macroeconomic headwinds. For investors navigating a world of policy uncertainty, understanding how these dynamics are shielding growth stocks from broader risks is critical.

The Shift from Speculation to Substance

The past year has seen a dramatic reallocation of capital. Speculative tech stocks, which dominated 2024's rally, have given way to sectors with tangible earnings and defensive characteristics. The Schwab Sector Views report underscores this trend: while all 11 S&P 500 sectors are rated as Marketperform for the next 12 months, industrials stand out. Their resilience stems from alignment with three megatrends—infrastructure reshoring, AI-driven automation, and defense spending.

Consider the industrial sector's Q2 performance. The S&P 500 Industrials Index gained 15% year-to-date, outpacing the broader market's 26% rebound since April. This outperformance was fueled by companies like GE Vernova (GEV), whose shares surged 70% in 2025. GE Vernova's Q2 earnings of $1.64 per share—a 131% year-over-year jump—highlight its dominance in power generation and electrification. Similarly, First Industrial Realty Trust (FIRT) reported a 10.53% earnings beat, driven by robust leasing activity and 33% cash rental growth. These results underscore how industrial players are leveraging structural demand from AI infrastructure and energy transition.

Defense and AI: The New Growth Pillars

The rearmament boom and AI infrastructure spending are reshaping the landscape. Defense contractors like Lockheed Martin (LMT) and Raytheon Technologies (RTX) have surged 30% year-to-date, benefiting from NATO's 5% defense spending commitment and U.S. military modernization. Meanwhile, the AI sector—despite a valuation correction—remains a key beneficiary of sector rotation. NVIDIA (NVDA), the poster child of the AI boom, reported $30 billion in Q2 revenue, driven by its Blackwell B200 GPU. Even as the sector's price-to-fair-value ratio dipped to 0.94 from 1.07, the underlying demand for AI infrastructure remains intact.

The energy transition is another area where sector rotation is paying off. While the Global Blue Chip strategy avoided energy stocks in Q2, the energy transition sub-sector has quietly gained traction. NextEra Energy (NEE), for instance, is on track to eliminate carbon emissions by 2045 through its Real Zero plan. With a 9% compound annual growth rate in adjusted EPS since 2003 and a dividend yield of 2.5%, NextEra exemplifies how clean energy companies can balance growth and stability.

Navigating Macro Risks: A Strategic Approach

The industrial sector's success isn't accidental—it's a product of strategic repositioning. Companies that have diversified into high-growth sub-sectors like defense, AI infrastructure, and electrification are outperforming peers in economically sensitive areas like airlines and logistics. For example, Schlumberger (SLB) has leveraged AI in its Delfi™ platform to improve reservoir analysis, driving a 32.8% pretax operating margin in Q2. Its recent acquisition of ChampionX also positions it to capitalize on the $30 billion production and recovery market.

However, investors must remain cautious. Elevated tariffs on steel and aluminum continue to strain global supply chains, and the Federal Reserve's 4.5% target rate environment remains a drag on high-growth stocks. Valuation risks are also emerging, particularly in defense and AI, where multiples have stretched. For instance, GE Vernova trades at a forward P/E of 58.38X—triple the peer average—raising questions about sustainability.

A Roadmap for Investors

For those seeking to harness sector rotation while mitigating macro risks, the path forward is clear:
1. Prioritize Resilient Sub-Sectors: Focus on defense, AI infrastructure, and energy transition plays with strong order backlogs and pricing power. GE Vernova, Schlumberger, and NextEra Energy are prime examples.
2. Diversify Exposure: Avoid overconcentration in any single sector. Schwab's Sector Views emphasize balanced exposure, blending industrial automation (e.g., Rockwell Automation) with energy transition leaders (e.g., Brookfield Renewable).
3. Monitor Valuation Metrics: While growth is compelling, ensure valuations align with fundamentals. Use price-to-earnings ratios, order backlogs, and earnings surprises as key indicators.

Conclusion: Resilience Through Adaptation

The 2025 market environment is defined by duality: macroeconomic risks persist, yet strategic sector rotation has created pockets of resilience. The industrial sector, with its alignment to AI, defense, and energy transition, offers a blueprint for navigating uncertainty. For investors, the lesson is clear—resilience isn't about avoiding risks but adapting to them. By focusing on earnings momentum and sector-specific tailwinds, it's possible to shield portfolios from macro volatility and position for long-term gains.

As the global economy transitions into a post-tariff clarity phase, the ability of industrial and energy transition stocks to leverage AI-driven efficiency and infrastructure demand will determine their future. For those with a long-term horizon, the industrial sector offers a compelling mix of stability and growth—a rare combination in today's markets.