Navigating Trade Tensions: How AI and Sector Resilience Will Steer Q2 Gains

Isaac LaneFriday, May 16, 2025 1:34 am ET
19min read

The first quarter of 2025 delivered a stark economic reality: U.S. GDP contracted by 0.3%, driven by a surge in imports and federal spending cuts—a supply-driven stumble that

warns could foreshadow deeper risks. Yet beneath the headline weakness lies a critical divide: while traditional sectors reel from trade tensions, tech-driven industries powered by AI are forging ahead. For investors, this is a moment to focus on sector-specific resilience, leveraging the asymmetry between macro headwinds and thematic tailwinds. Here’s how to navigate it.

The Supply-Side Squeeze: Why Tariffs Are the New Volatility Driver

BlackRock’s Q2 outlook underscores a critical shift: U.S.-China trade policies are now a prime driver of GDP volatility. The 0.3% Q1 contraction was amplified by a 41.3% spike in imports—driven by businesses front-running tariffs on Chinese goods. But this isn’t just a temporary blip. BlackRock warns that fully implemented tariffs could push effective U.S. import costs to levels unseen since the 1930s, destabilizing supply chains for critical inputs like semiconductors and auto parts.

The ripple effects are already visible:
- Inflation is climbing, with core PCE hitting 3.6%—a red line for the Fed.
- Policy uncertainty has spiked, with the U.S. Trade Policy Uncertainty Index nearing 2008 crisis levels, deterring business investment.

Yet amid this storm, AI is acting as a ballast. S&P forecasts Q2 GDP growth rebounding to 2.1%, fueled in part by tech-driven productivity gains. The key is to avoid sectors entangled in supply chain fragility and bet on those insulated by innovation.

Where to Deploy Capital: Overweight Tech, Underweight Traditional Autos

1. U.S. Tech & Semiconductors: The AI Growth Engine
BlackRock’s “overweight” stance on U.S. equities hinges on AI’s capacity to offset macro drag. Sectors like semiconductors are not just beneficiaries of tech spending—they’re essential to the AI revolution.


NVIDIA’s 40% rise in 2025 contrasts sharply with the S&P 500’s flat performance, reflecting investor faith in AI’s transformative power. Firms like AMD, Intel, and cloud infrastructure players (e.g., AWS) are similarly positioned to capitalize on rising demand for data processing and AI chips.

Why now?
- Earnings resilience: S&P 500 tech earnings are on track for 8-10% growth in 2025, outpacing broader market declines.
- Valuation support: Even at elevated multiples, AI’s long-term ROI justifies selective exposure.

2. Japan: Reforms and Resilience
BlackRock’s “overweight” on Japan isn’t just about value—it’s about policy-driven resilience. Structural reforms, including corporate governance overhauls and yen stability, are boosting investor confidence.

Japan’s equity market has outperformed EM peers by 8% year-to-date, a gap likely to widen as its economy—less exposed to China trade—benefits from global AI demand.

Avoid These Traps: Automakers and EM Vulnerability

1. Automakers: Stuck in the Supply Chain Crossfire
The Q1 GDP report highlighted a 1.8% decline in durable goods spending, with automobiles leading the slump. Why? Tariffs on Chinese auto parts and semiconductors are raising costs, squeezing margins.


Toyota’s 12% underperformance versus the Shanghai Composite (down 5%) reflects its reliance on China’s supply chains. Until trade tensions ease, automakers remain vulnerable.

2. Emerging Markets: Collateral Damage
EM equities (MSCI EM Index) are neutral territory. BlackRock warns that U.S. tariffs are dragging on EM growth, particularly in China, where GDP is constrained by external headwinds.

The Fed’s Tightrope: Rates, Inflation, and Liquidity

The Federal Reserve faces a dilemma: inflation (3.6% PCE) is elevated, but labor markets are cooling. S&P expects the Fed to hold rates at 4.50% until Q4, with cuts delayed until 2026. This policy pause creates a window for tactical bets on AI-driven sectors, which benefit from stable rates and corporate cash flows.

Final Call: Go Sector-Selective, Stay Thematic

The Q2 landscape demands disciplined risk-taking. Investors should:
1. Overweight U.S. tech/semiconductors for AI-driven growth.
2. Embrace Japan for reform-fueled resilience.
3. Avoid automakers and EM exposure tied to trade friction.

The macro backdrop is choppy, but sector-specific resilience is your compass. As BlackRock notes, “policy uncertainty won’t last forever”—but the winners will be those who bet on the industries rewriting the rules.

The race is on. Act before the next disruption hits.