Trade Truce and Fed Pause: Navigating the New Investment Landscape

The temporary de-escalation of U.S.-China trade tensions since May 2025 has injected cautious optimism into global markets, driving a rotation into trade-sensitive sectors like industrials and technology. Concurrently, weaker U.S. jobs data and declining bond yields signal growing expectations for a Federal Reserve rate cut by late 2025. This confluence of geopolitical and monetary developments presents a strategic opportunity to position portfolios for sectors benefiting from reduced trade friction and lower interest rates—while avoiding industries still exposed to tariff risks.

The Trade Truce: A Fragile Boost for Growth Sensitive Sectors

The May 12 agreement to roll back tariffs for 90 days—reducing U.S. rates from 145% to 30% and Chinese tariffs from 125% to 10%—has eased immediate supply chain pressures and stabilized investor sentiment.

. Equity markets have responded positively, with trade-exposed sectors like industrials and semiconductors leading gains.

The industrials sector, which had languished under trade uncertainty, has rebounded 8% since the truce began, while tech stocks, critical for China's “New Infrastructure” push, have climbed 6%. Automakers, particularly those reliant on Chinese rare earth exports, have also rallied, with General Motors and Toyota shares up 5% and 4%, respectively.

However, this truce is fragile. Pre-existing tariffs (Section 301 and 232 measures) remain in place, and China's threat to reimpose export controls on critical minerals looms. Investors should focus on companies with diversified supply chains or pricing power, such as Boeing (diversified production) or NVIDIA (dominant in AI chip design).

Fed Policy: Rate Cuts on the Horizon?

While the trade truce reduces near-term risks, the U.S. labor market is showing signs of softening. May's nonfarm payrolls added just 125,000 jobs—below the 130,000 estimate—and initial jobless claims hit their highest level since October 2024. Wage growth, a key inflation driver, slowed to 3.8% year-on-year in April, easing pressure on the Fed to hike rates.

The 10-year Treasury yield has fallen to 4.3%, its lowest since February, reflecting market pricing of a 50% chance of a rate cut by December 2025. This creates a supportive backdrop for equity valuations, particularly for rate-sensitive sectors like consumer discretionary and real estate.

Strategic Sector Rotations: Where to Deploy Capital

1. Industrials and Technology:
2. Industrials: Focus on companies with global exposure and resilience to trade cycles. Caterpillar (CAT) and Boeing (BA) could benefit from improved capital spending and reduced supply chain bottlenecks.

3. Technology: Cloud infrastructure and semiconductor firms are poised to gain from China's digital transformation. Microsoft (MSFT) and Intel (INTC) offer exposure to this theme.

4. Consumer Discretionary:
   Lower borrowing costs and stabilizing consumer confidence could lift discretionary spending. Amazon (AMZN) and Home Depot (HD) are well-positioned, though investors should avoid retailers with heavy reliance on Chinese imports (e.g., Walmart's private-label goods).

5. Financials:
   Banks like JPMorgan Chase (JPM) and Citigroup (C) may underperform if rate cuts reduce net interest margins. However, insurers (e.g., Berkshire Hathaway (BRK.A)) could benefit from falling bond yields.

Risks and Caution Flags

• Tariff-Exposed Sectors: Steel and aluminum stocks (e.g., Nucor (NUE)) remain vulnerable to U.S. Section 232 tariffs, which were raised to 50% in June.
• Geopolitical Volatility: The truce expires in August 2025. If talks fail, investors should expect renewed market volatility and a reversal of sector rotations.

Conclusion

The U.S.-China trade truce and dovish Fed expectations have created a window of opportunity for strategic sector rotations. Investors should overweight industrials, technology, and consumer discretionary sectors while hedging against renewed trade conflict. However, the path to sustained growth remains uncertain—geopolitical risks and labor market data will dominate market direction in the coming months. As always, diversification and a long-term horizon are critical in this fragile landscape.

The data underscores the importance of selective investing. While the truce has breathed life into trade-sensitive sectors, the ultimate test will come when the 90-day deal expires—and the Fed's next move becomes clearer.