Of all the S&P 500 sectors that have reeled from President Donald Trump’s trade war, strategists at 22V Research have identified three that they say will rebound the most on any easing of the tariff-fueled turbulence: energy, financial and tech shares.
A decline in these sectors coincided with a jump in how much tariff news contributed to their volatility in April, according to 22V’s calculations. In the case of energy, tariffs explain more than 90% of its gyrations in the past month. That’s the highest among the 11 S&P 500 Index sectors, and is up from about 50% as of April 2, when Trump unveiled a sweeping set of levies.
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The energy sector dropped 16% in that span. Because of this correlation, the research firm assumes the opposite will also be true: that the stocks will recover as tariffs contribute less to their volatility.
“Everything is so attached to tariff risks right now, which makes longer-term positioning incredibly difficult,” said Kevin Brocks, director of 22V Research, which uses statistical analysis to determine the most important market input. “We are focused on short-term opportunities, which are currently favorable for risk.”
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As he sees it, “if tariff volatility calms down, it is fair to assume energy, tech and financials outperform over the next few weeks.”
There are already signs that buyers are piling into stocks of companies from these sectors. Energy ETFs drew in $129 million last week, some of the highest flows among other sector-based ETFs, according to Bank of America. And hedge funds purchased the most U.S. financial stocks in four months last week, according to Goldman Sachs Group’s prime brokerage desk.
Dennis Debusschere, president of 22V and one of the strategists behind the volatility research, has a track record of getting things right. In March 2020, he said US stocks could quickly retrace their losses if fiscal stimulus took hold, and that’s what happened.
In early July, he said he expected a rotation out of the safety of big-tech names and into riskier parts of the market. The Nasdaq 100 Index ended up trailing the small-cap Russell 2000 Index by 12 percentage points that month.
Beneficiaries
U.S. stocks have convulsed in April as investors reacted to twists and turns in Trump’s tariff policies. Even though markets have somewhat calmed this week, there’s no guarantee that tariff-related shocks will cease. That has kept turbulence elevated relative to its 12-month average, despite the Cboe Volatility Index having retreated from a roughly five-year high.
With any easing of tariff worries, the energy sector would be a prime beneficiary because the brightening global economic outlook could stoke more demand for oil. Similarly, stronger consumer spending could boost credit card usage and lending activity, buoying financial companies. Meanwhile, demand for gadgets and electronics once there’s clarity on tariffs bodes well for the tech sector.
The market has “greatly overreacted to the idea of the economic fears of an economic slowdown so any good news on the tariff front could drive gains in those sectors,” said Cole Smead, CEO of Smead Capital Management.
