Trade Deal Optimism and Retail Resilience: A Dual Catalyst for U.S. Equity Outperformance

The U.S. equity market in 2025 is being shaped by two powerful, yet contrasting forces: the unresolved U.S.-EU trade negotiations and the surprising resilience of consumer discretionary spending. As investors navigate this duality, strategic positioning in sectors poised to benefit from either a trade deal or sustained retail demand could unlock significant alpha.

The U.S.-EU Trade Tightrope: A High-Stakes Game of Diplomacy and Market Volatility

The U.S. and European Union remain locked in a high-stakes trade standoff, with August 1 looming as a critical deadline. President Trump has framed the negotiations as a “50-50” proposition, emphasizing that any agreement must involve reciprocal tariff cuts. The EU, meanwhile, has signaled openness to a 15% baseline tariff on its exports to the U.S., paired with higher levies on steel and aluminum (50%), but remains wary of Trump's history of last-minute renegotiations.

The potential for a resolution—or its absence—has created a volatile backdrop for trade-exposed sectors. A deal could alleviate near-term uncertainty, particularly for automotive and aerospace firms, while a no-deal scenario risks triggering retaliatory measures like the EU's Anti-Coercion Instrument. For investors, this duality demands a nuanced approach: hedging against near-term volatility in export-dependent industries while capitalizing on long-term structural trends.

Consumer Discretionary: Resilience Amidst Uncertainty

Despite trade tensions, U.S. consumer discretionary sectors have shown surprising resilience in 2025. Q2 2025 data revealed a rollercoaster pattern: a 1.4% monthly retail sales surge in March (driven by pre-tariff panic buying) was followed by a 0.9% decline in May and a partial rebound in June. This volatility underscores the sector's sensitivity to trade policy but also highlights its adaptability.

Key subsectors like automotive and electronics have experienced sharp swings. For example, auto sales dipped 3.5% in May but rebounded 1.3% in June, while electronics and furniture remain under pressure due to lingering caution. However, adjusted for inflation, consumer spending growth held at 1.5% in Q2, outpacing expectations. This resilience is driven by a combination of wage growth, easing inflation, and strategic consumer behavior (e.g., shifting to digital channels and delaying non-essential purchases).

Strategic Positioning: Balancing Trade Risks and Retail Tailwinds

The interplay between trade uncertainties and retail resilience creates a unique investment landscape. Here's how to position for both scenarios:

1. Trade-Exposed Sectors: Hedging and Opportunities
2. Automotive: European automakers like Stellantis (STLA) and Volkswagen (VOW) are at risk of U.S. tariffs but present undervalued opportunities. Stellantis, trading at a 42.6% discount to fair value, has already absorbed $500 million in tariff-related costs. A trade deal could unlock value for firms with U.S. production capacity.
3. Aerospace: Airbus and Boeing face potential EU retaliatory tariffs on U.S. exports, but the sector benefits from defense spending and rearmament trends. Investors should prioritize companies with diversified portfolios and strong capital buffers.

4. Semiconductors: AI-driven firms like Nvidia (NVDA) and Broadcom (AVGO) are thriving despite trade tensions. These companies are positioned to benefit from both U.S. domestic production incentives and global demand for AI infrastructure.

5. Consumer Discretionary: Capitalizing on Resilience

6. Retail: Easing tariffs on Chinese imports (e.g., reduced from 145% to 30%) have stabilized pricing for essential goods like apparel and electronics, creating a window for retailers to recalibrate inventory and pricing strategies.
7. Luxury Goods: While LVMH (LVMHF) has underperformed due to sluggish Chinese demand, the sector's long-term appeal remains intact. Strategic investments in occasion-based selling and generative AI could help brands adapt to value-seeking behaviors.
8. Digital Transformation: 79% of retail executives plan to boost digital investments in 2025. Firms leveraging precision analytics and AI-driven demand forecasting are better positioned to navigate trade-related disruptions.

The Path Forward: Dual Catalysts for Equity Outperformance

As the U.S. and EU approach their August 1 deadline, investors must prepare for both outcomes. A trade deal could stabilize aerospace and automotive sectors, while sustained retail resilience supports discretionary spending. Conversely, a no-deal scenario may force the EU to deploy retaliatory measures, creating short-term volatility but also mispriced opportunities in undervalued sectors.

Investment Recommendations:
- Overweight: Semiconductors (NVDA, AVGO), AI infrastructure, and U.S. energy infrastructure.
- Underweight: Export-dependent industries like automotive and agriculture.
- Hedge: Short-term options on EU automakers (STLA, VOW) to mitigate U.S. tariff risks.

The dual forces of trade deal optimism and retail resilience are reshaping the equity landscape. By strategically balancing exposure to trade-exposed sectors and capitalizing on consumer demand trends, investors can position themselves to outperform in a world of uncertainty.