Trade Truce Sparks Rally: Navigating Equity Opportunities in a Post-Tariff Landscape

The May 2025 U.S.-China trade truce, which slashed tariffs on bilateral trade to 30% and 10% respectively, has injected a shot of adrenaline into global markets. The agreement's 90-day pause on tariff escalations has sparked a 3-4% surge in the S&P 500, with cyclical sectors like retail, autos, and industrials leading the charge. But beneath the optimism lies a precarious balancing act: the truce's temporary nature and unresolved structural issues mean investors must tread carefully. Here's how to position portfolios for this new phase.

The Consumer Confidence Catalyst

The truce's most immediate impact is its effect on consumer sentiment. The Conference Board's May 2025 consumer confidence index surged to 98, the largest monthly gain in four years, as households anticipate lower prices for imported goods. This optimism is already translating into sector-specific opportunities:

1. Retail: Lower tariffs on Chinese imports—particularly apparel, electronics, and home goods—reduce cost pressures for retailers. . Companies with heavy reliance on Chinese supply chains, such as Target and Best Buy, are poised to expand margins as input costs decline.

2. Automotive: The rollback of auto tariffs (from 145% to 30% on U.S. exports to China and vice versa) has reignited cross-border demand. Ford and General Motors, which derive 15-20% of revenue from China, are key beneficiaries. Meanwhile, auto parts suppliers like Lear Corp. and BorgWarner gain from smoother supply chains.

3. Industrials: Reduced tariffs on machinery, semiconductors, and construction materials have boosted optimism among manufacturers. Caterpillar and 3M, which rely on cross-border trade for both inputs and sales, now face less headwind. Industrial ETFs like the Industrials Select Sector SPDR Fund (XLI) have outperformed the broader market by 200 basis points since the truce.

The Cautionary Undercurrent: Inflation and Geopolitical Risks

While the truce has sparked optimism, two critical risks remain:

1. Persistent Inflation Pressures: Despite the tariff cut, the U.S. effective import tariff rate remains elevated at 15.8%—the highest since WWII. Analysts warn that lingering trade barriers could push core inflation above 3% by year-end. . Higher yields compress equity valuations, especially for rate-sensitive sectors.

2. Geopolitical Volatility: The truce's 90-day lifespan creates a “use it or lose it” dynamic. If negotiations stall, tariffs could rebound, reigniting supply chain disruptions. Semiconductor stocks like AMD and NVIDIA, which face non-tariff barriers in China, remain vulnerable to renewed tensions.

Portfolio Strategy: Overweight Cyclicals, Underweight Defensives

The truce's success hinges on its ability to stabilize trade flows and consumer spending—sectors that thrive in growth environments. Investors should:

• Overweight Cyclical Sectors: Target industrials, autos, and retailers with China exposure. These sectors now trade at 10-15% discounts to their 2024 highs, offering a margin of safety.
• Underweight Defensive Plays: Utilities and REITs—typically safe havens—have lost luster as bond yields rise. The Vanguard Utilities ETF (VPU) has underperformed the S&P 500 by 8% since the truce, reflecting reduced demand for low-beta assets.
• Monitor Liquidity: The bond market's resilience (investment-grade corporates rose 0.19% post-truce) signals strong demand for credit, but heavy issuance ($40B in May alone) may test spreads. Rotate capital into equity winners while bond yields remain elevated.

Final Call: Act Now, but Stay Nimble

The trade truce has created a window of opportunity for equity investors. Cyclicals tied to Chinese trade, such as Caterpillar (CAT), Ford (F), and the Consumer Discretionary Select Sector SPDR (XLY), are primed to capitalize on improved sentiment. However, the clock is ticking—the 90-day truce must be extended for this rally to endure.

Investors should deploy capital now but keep a wary eye on tariff negotiations and inflation data. This is a moment to lean into growth, but not lose sight of the risks lurking in the shadows.

Act now—before the window closes.