Navigating Trade Tensions: Can Equity Markets Sustain Their Rally?

The recent de-escalation of US-China trade tensions has sparked a resurgence in equity markets, with tech megacaps and European equities leading the charge. However, the sustainability of this rally hinges on navigating a precarious balance of tariff reductions, corporate earnings revisions, and a weakening US dollar—all while geopolitical risks linger. Let's dissect the opportunities and pitfalls.

US-China Trade: A Fragile Truce, But Momentum Builds

The partial rollback of tariffs—US tariffs on Chinese goods reduced to 30%, and Chinese tariffs on US goods to 10%—has eased immediate trade pressures. This de-escalation, finalized in Geneva, has allowed companies in sectors like semiconductors and cloud infrastructure to stabilize supply chains.

For instance, reflect this dynamic. Oracle's cloud revenue surged 27% year-over-year in Q2 2025, driven by demand for its Oracle Cloud Infrastructure (OCI), which now accounts for 52% of cloud growth. Similarly, Micron Technology's earnings are projected to jump 153% year-over-year, fueled by AI-driven demand for high-bandwidth memory (HBM).

However, unresolved issues—such as intellectual property disputes, China's rare earth export controls, and the $262 billion US trade deficit—remain. Investors must remain wary of policy reversals, particularly with courts still reviewing “fentanyl” tariffs and reciprocal trade measures.

The Weakening Dollar: A Tailwind for European Equities

The US dollar's decline—currently trading at 1.14952 EUR/USD as of June 19, 2025—has been a boon for European equities. reveal a 12.6% annual appreciation of the euro, amplifying returns for US investors.

European equities, represented by the Euro Stoxx 50, trade at a forward P/E of 15x, sharply below the S&P 500's 22x. This valuation gap, combined with the ECB's dovish stance (deposit rate at 2.75% and falling), has made sectors like industrials (+13% in 2025), financials (+8%), and healthcare (+5%) compelling buys.

Key plays include:
- ASML Holding (ASML): Benefiting from EU defense spending and semiconductor demand.
- Siemens (SIE): Leveraging industrial upgrades in renewable energy.
- Allianz (AZSE): A defensive play in a low-rate environment.

Tech Megacaps: Growth Amid Valuation Concerns

The Russell Reconstitution of 2025 underscores a shift in tech giants' profiles. Amazon, Alphabet, and Meta have transitioned to hybrid growth/value stocks due to higher book-to-price ratios and slower growth expectations. This reclassification reflects their maturation but also raises questions about overvaluation.

• Oracle (ORCL): With cloud RPO hitting $138 billion, its valuation at 22x forward earnings seems justified.
• Micron (MU): Its HBM dominance and 153% earnings growth in Q2 2025 justify its current multiple.

However, risks persist. The S&P 500's 22x multiple offers little cushion, and Fed uncertainty—potentially delaying rate cuts—could pressure valuations.

Caution Flags: Overvaluation and Geopolitical Risks

While the rally is real, two red flags demand attention:
1. Overheated Valuations: Tech megacaps trade at premiums that may not reflect slowing growth.
2. Geopolitical Volatility: The Israel-Iran conflict, Russia's energy leverage, and China's tech export controls threaten to reignite trade wars.

Investors should avoid cyclical sectors like logistics (e.g., FedEx's 1% Q2 revenue decline) and overexposure to tariff-sensitive industries.

Actionable Allocations for a Balanced Portfolio

1. Overweight European Equities:
2. ETFs: FEZ (Euro Stoxx 50 ETF) for exposure to the weak dollar and undervalued sectors.

3. Sector Focus: Industrials (ASML, Siemens) and financials (Allianz).

4. Tech Megacaps with Structural Growth:

5. Oracle (cloud infrastructure) and Micron (HBM leadership) offer defensible moats.

6. Hedging:

7. Use EUR/USD put options post-Q3 to mitigate currency risk.

8. Avoid:

9. Tariff-vulnerable sectors (e.g., automotive, energy) and overvalued growth stocks.

Conclusion: A Delicate Dance Between Hope and Caution

The current rally is no accident—tariff de-escalation, ECB support, and dollar weakness have created fertile ground for equities. Yet, complacency is dangerous. Investors must balance exposure to tech and European equities while hedging against policy reversals and geopolitical shocks.

The key question remains: Can this optimism outlast the unresolved issues? For now, the answer leans toward cautious optimism—but keep one eye on the exits.