Sector ETFs

A Gameplan for the Trade War

Bipan Rai
Managing Director, Head of ETF & Structured Solutions Strategy
Apr. 14, 2025
  • So here we are. Just a few short months after his inauguration, U.S. President Donald Trump has fired the opening salvo of a global trade war.
  • While precise estimates on the new U.S. average effective tariff rate vary, there is broad consensus that it is well north of 20%. That is a stark difference from where it was a few months back (around 2-3%), and it signals a return for the U.S. to restrictive trade policies not seen since the days of the Great Depression just under a century ago.
  • As the hub of the global commerce and finance network, the United States’ pivot towards higher trade and capital barriers represents a significant macroeconomic shock. And as a result, broad risk markets have come under a significant amount of pressure with the S&P 500 still 13% below its peak from earlier this year.
  • From a sectoral perspective, the effects of the trade war are apparent. The tech sector has been the underperformer so far this year (Chart 1) – which is not surprising considering the aggregate revenue share that is generated outside of the United States (Chart 2). Indeed, we’ve also seen the street revise earnings lower for that sector by an appreciable degree (Chart 3).
  • But our readers should also remember that a weaker trade backdrop will also truncate the time it takes for the U.S. economy to shift from expansion to slowdown. So as the tariff headlines fade, and real economic data point to weaker activity, defensive sectors should still provide some value. That suggests that Consumer Staples, Utilities and Health Care are worth keeping an eye on.
  • We still sense that markets are underestimating the potential for a weaker earnings backdrop for other sectors. In particular, we think the market has more room to price in softer earnings for sectors like Materials, Communications as well as Consumer Discretionary.

Sectors We Like:

Chart 1 – Returns by Sector

Chart 1 – Returns by Sector
*MAVG = moving average. 1Source: BMO Global Asset Management, as of April 11, 2025. For illustrative purposes only. Past performance is not indicative of future returns. The 50/100 day moving average is calculated by averaging the closing prices of a stock or asset over the past 50/100 trading days, and is used by analysts to identify trends. Green = more bullish signal. Red = more bearish signal.

Chart 2 – Estimated Share of Revenues Generated Outside of the US

Chart 2 – Estimated Share of Revenues Generated Outside of the US
Source: BMO GAM/​Bloomberg.

Chart 3 - Earnings and Valuation

Chart 3 - Earnings and Valuation
Source: BMO Global Asset Management. Y/Y = year over year. P/E refers to Price-to-Earnings Ratio, which analysts use as a valuation metric. The forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) earnings per share (EPS) of that company. Z-Score is a measure of how much a data point varies from the average of the entire data set. A positive z-score says the data point is above average. A negative z-score says the data point is below average. The closer the Z-score is to zero, the closer the value is to the mean. As of April 11, 2025. For illustrative purposes only. Past performance is not indicative of future returns. Green = more bullish signal. Red = more bearish signal.

Chart 4 – Seasonality Chart (Avg Return Over Past 35 Years)

Chart 4 – Seasonality Chart (Avg Return Over Past 35 Years)
Source: BMO Global Asset Management. As of February 5, 2025. For illustrative purposes only. Past performance is not indicative of future returns. Green = more bullish signal. Red = more bearish signal.

Chart 5 – BMO GAM Quant Model

Chart 5 – BMO GAM Quant Model
Source: BMO Global Asset Management. Note: Industry Rotation Score = a measure that uses momentum, disposition and growth as inputs to identify potential rotation opportunities. Scale is from -3 to +3, with the higher score indicating a more positive outlook. As of April 11, 2025. For illustrative purposes only. Past performance is not indicative of future returns.

Disclaimers:

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This is for information purposes only. The information contained herein is not, and should not be construed as investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

You cannot invest directly in an index.

Sector ETF products are also subject to sector risk and non-diversification risk, which generally will result in greater price fluctuations than the overall market.

The Select Sector SPDR Trust consists of eleven separate investment portfolios (each a​“Select Sector SPDR ETF” or an​“ETF” and collectively the​“Select Sector SPDR ETFs” or the​“ETFs”). Each Select Sector SPDR ETF is an​“index fund” that invests in a particular sector or group of industries represented by a specified Select Sector Index. The companies included in each Select Sector Index are selected on the basis of general industry classification from a universe of companies defined by the S&P 500®. The investment objective of each ETF is to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in a particular sector or group of industries, as represented by a specified market sector index.

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