Sector Plays for the Bull Case Scenario

In a recent equity strategy publication (ask your LPL advisor for the latest Equity Strategy Insights publication if interested), we identified potential sector winners and losers under various tariff scenarios. During the high tariff, high trade uncertainty regime (we called it phase one), we identified consumer staples, real estate, utilities, and gold as potential winners. Well, that phase may be behind us.

For the low tariff, trade clarity regime, or phase two, we identified communication services, consumer discretionary, industrials, and technology as potential winners, with communication services as our preference. Now that the stock market is tracking toward phase two — though perhaps with higher confidence than we at LPL Research may have right now — this sector list becomes more interesting.

Communication Services: According to an analysis from Bloomberg in March 2025, the communication services sector has the highest percentage of cost of goods sold sourced outside the U.S. of all S&P 500 sectors. Given the sector is still favored in our quantitative fundamental and technical work, we put it at the top of the list of sectors well positioned for phase two. The sector has the lowest (best) price to earnings (P/E)-to-growth ratio of all 11 S&P equity sectors, has registered the biggest earnings upside surprise, and second strongest earnings growth among sectors during first quarter earnings season.

Risks include internet regulation for the big digital media companies and the threat of tariffs on international movies.

LPL Research Outlook: Overweight

Information Technology: Technology has been the best performing sector since the April 8 low (+31% vs. +18% for the S&P 500), suggesting it deserves strong consideration as a winner from lower tariffs. The sector could easily grow earnings 20% this year as artificial intelligence (AI) investment continues, although the technical picture has not been quite as strong as comm services over the last month or so. Still, the magnitude of the bounce off the early April lows cannot be ignored. Heavy China exposure from the likes of Apple (AAPL) and others offers the sector a big opportunity if tariffs stay low.

Valuations have risen from attractive to middle of the range at a 28% premium to the S&P 500’s forward P/E. The sector has come a long way in a short period of time. And we still have some concerns about semiconductor tariffs and export restrictions which may still be implemented later to protect national security interests.

LPL Research Outlook: Neutral

Consumer Discretionary: Consumer discretionary is one of the sectors most impacted by tariffs, making it one of the likely winners if levies stay low. Policy uncertainty hurts consumer confidence, while tariffs on apparel makers and autos are particularly biting. About half the sector’s costs of goods sold are sourced from outside the U.S., which is high, but less than technology. If low-cost goods can still be sourced from China, or elsewhere in Asia in a low tariff regime, consumer discretionary is positioned to be one of the biggest beneficiaries relative to the downside risk markets priced in at the April lows.

A successful renegotiation of the United States-Mexico-Canada Agreement (USMCA) with Canada and Mexico can help mitigate downside risk for these industries as well as restaurants given the high volume of food imports from Mexico and Canada. Valuations are relatively attractive still, though if tariffs increase post-pause risks to earnings are about as high as any sector. Plus, the relatively muted earnings outlook and negative earnings revisions further tempers our enthusiasm. Pressures on consumers from higher borrowing costs and the cumulative effects of inflation were building before tariffs. Lower prices at the pump ahead of summer driving season are a partial offset. If we had more conviction that tariffs would stay at 30% for China and 10% for the rest of the world, we would be more interested.

LPL Research Outlook: Neutral

Industrials: Industrials are a likely winner in a potential low tariff regime given significant international exposure, including in China, and are now the best performing sector year to date (+6.7%). Less uncertainty can broadly help spark more capital investment, and some of the trade and investment agreements President Trump is working on will include capital investment in the U.S. About half of the sector’s cost of goods sold is sourced outside the U.S., leaving industrial companies with a lot to gain from low tariffs. Meanwhile, near-shoring, data center buildouts, supply chain shifts, and tax incentives to invest in the U.S. all present revenue opportunities for the industrials sector, particularly machinery and construction equipment.

Risks besides higher tariffs include reductions in infrastructure spending from the Inflation Reduction Act (IRA) and exposure to reduced capital investment by the energy sector due to languishing oil prices. Less global trade is negative for the global logistics providers such as FedEx (FDX) and UPS (UPS). And finally, a fair amount of this upside potential is probably priced in with the sector trading at a 10% premium to the S&P 500 on a forward P/E basis.

LPL Research Outlook: Neutral with a Positive Bias

Technology Leadership Since the April Low Suggests It's a Post-Tariff Winner

Source: LPL Research, Bloomberg, 05/14/25
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