Navigating Q2 2025: Three Sectors to Bet on Amid Policy Uncertainty and AI's Rise

The second quarter of 2025 is shaping up as a pivotal period for investors, marked by geopolitical fragmentation, shifting trade policies, and the accelerating monetization of artificial intelligence (AI). With U.S. tariff uncertainties clouding sector-specific forecasts and inflation risks lingering, the investment landscape demands a nuanced approach. Amid this backdrop, three sectors—Software, Global Infrastructure, and Regional Banks—are emerging as strategic opportunities to capitalize on secular trends while navigating near-term volatility.

The AI Opportunity: Software Stocks at a Crossroads

The Software sector has been a rollercoaster in early 2025. Q1 saw stocks decline over 10%, pressured by market volatility and investor risk aversion. Yet, the pullback has created an attractive entry point for long-term investors. The S&P Software & Services Select Industry Index now trades at a record discount to large-cap peers and the broader market—a sign that valuations are pricing in near-term uncertainty rather than long-term potential.

Why now? The AI revolution is no longer theoretical. Companies like DeepSeek, which open-sourced its advanced AI models, are slashing development costs for software firms. AI model prices for equivalent performance are projected to decline by 10x annually, accelerating adoption across industries. This cost efficiency is enabling businesses to integrate AI into everything from customer service (think Salesforce's Agentforce platform, which resolved 380,000 interactions with an 84% success rate in 90 days) to manufacturing and logistics.

Data Point:

The SPDR® S&P® Software & Services ETF (XSW) offers a compelling way to tap into this trend. Unlike traditional tech ETFs that overweight mega-cap stocks, XSW uses an equal-weight strategy, diversifying risk while capturing growth across software subsectors. With global AI spending expected to hit $749 billion by 2028, this ETF is positioned to benefit from both innovation and the secular shift toward enterprise AI.

Building for the Future: Global Infrastructure's Defensive Appeal

While Software is all about growth, Global Infrastructure offers a shield against inflation and policy risks. U.S. trade tariffs and supply chain disruptions have pushed inflation expectations higher, but infrastructure stocks—think airports, utilities, and energy storage—historically thrive in such environments. Their stable cash flows and inflation-hedging characteristics make them a defensive anchor in turbulent markets.

The tailwinds here are structural. Europe's NextGenerationEU fund (€807 billion) and Germany's €500 billion infrastructure plan are pouring capital into energy and transportation networks. In the U.S., the grid must double its capacity by 2037 to meet demand from EVs and data centers. Meanwhile, China's push for renewables and digital infrastructure adds a global dimension to the opportunity.

Data Point:

The SPDR® S&P® Global Infrastructure ETF (GII) tracks 75 global infrastructure stocks, offering exposure to both developed and emerging markets. Its diversification—spanning utilities, energy, and transportation—ensures investors benefit from multiple regional growth engines while shielding portfolios from sector-specific downturns.

Regional Banks: Undervalued and Underappreciated

Regional banks have been overshadowed by the AI-driven rally in mega-cap Tech stocks, but their fundamentals are quietly strong. Despite Q1 underperformance, regional banks boast expanding net interest margins (NIM) and rising loan balances. With 2025 EPS estimates near a one-year high (16.6% growth) and share buybacks surging (authorized programs hit $41B in early 2025), this sector is primed for a rebound.

Critically, regional banks are insulated from global trade conflicts. Their domestic revenue streams and smaller-scale operations make them less exposed to tariff-driven cost increases or supply chain disruptions. The current valuation discount—stocks trade 16% below their long-term median—suggests the market has yet to fully price in their resilience.

Data Point:

The SPDR® S&P® Regional Banking ETF (KRE) provides a straightforward way to access this sector. It tracks 60 regional banks, offering exposure to a group that's benefiting from deregulation (e.g., easing of capital rules) and strong demand for loans in a still-growing U.S. economy.

The Bigger Picture: Policy Uncertainty and Strategic Allocation

BlackRock's Q2 outlook underscores the importance of sector diversification. While the firm remains bullish on developed-market equities (U.S. and Japan, in particular), it warns that geopolitical fragmentation and tariff risks could dampen growth. This environment favors sectors like Software (growth), Infrastructure (defensive), and Regional Banks (undervalued) over concentrated bets in Tech or long-dated bonds.

Final Take:
Investors should use this quarter to rebalance portfolios toward these three sectors. The XSW, GII, and KRE ETFs offer targeted exposure with minimal sector overlap. While near-term volatility is inevitable—especially as trade policies evolve—the secular tailwinds in AI, infrastructure spending, and domestic banking make these sectors compelling long-term bets.

As always, proceed with caution: monitor inflation trends (via the GII's sensitivity to Treasury yields) and keep an eye on tariff negotiations. But with valuations attractive and fundamentals improving, now is the time to position for the next phase of economic transformation.