S&P500: Will Defensive Sectors Lead Again as Traders Brace for Trade Policy Clarity?

Tariffs and Inflation Rattle Markets as Traders Brace for April 2

With tariff clarity on deck and volatility climbing, traders are leaning defensive and watching sector rotation cues heading into the April 2 trade announcement. Positioning has tilted toward value over growth, with renewed interest in health care and financials—areas seen as more insulated from trade blowback. For now, maintaining flexibility while favoring sectors with pricing power and limited foreign exposure is the preferred approach.

Why are markets reacting ahead of policy clarity?

Last week’s sudden 25% tariff on all non-U.S. made cars—set to take effect April 3—hit markets hard, sending automakers and parts suppliers tumbling. The move came just days ahead of a broader plan to impose reciprocal tariffs by country, expected to be outlined this Tuesday. While some trading partners may seek exemptions or negotiate reductions, others are likely to retaliate, adding a layer of complexity that traders are already pricing in.

Friday’s 2% selloff capped a volatile week, with inflation worries compounding tariff stress. Consumer durables, retail, and communications outperformed, while health tech and utilities lagged. Gold marked its fourth straight weekly gain as risk sentiment deteriorated, while oil held firm and crypto remained quiet.

Are the fundamentals still supportive for equities?

Yes, but the trade narrative is distorting visibility. Corporate earnings growth remains strong, with S&P 500 estimates still calling for over 10% gains this year. Labor markets are firm, the Fed is holding steady, and high-yield credit spreads are still narrow—none of which point to an imminent downturn.

Still, tariffs could slow growth and drive goods inflation higher. The U.S. may be less trade-reliant than other economies, but any stagflation risk would pressure margins and consumer sentiment. With the Economic Policy Uncertainty Index near pandemic highs, traders are hesitant to chase rebounds too aggressively.

What’s the best way to approach this market?

With a binary event on the calendar and a wide range of possible outcomes, this is a market favoring balanced exposure. Health care and financials offer relative safety with attractive valuations, while a measured tilt toward value can provide insulation if trade stress escalates.

While a V-shaped rally seems unlikely, the current pullback may open selective opportunities—especially if the April 2 announcement signals a softer, more targeted tariff regime.

For now, staying diversified, overweight equities modestly, and watching sector leadership closely is the playbook. Traders should be ready to adjust positioning once policy clarity arrives.

More Information in our Economic Calendar.