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TARIFFS AND WHY IT'S GOOD TO REDUCE CONSUMER DISCRETIONARY RISK

A key strategy for investors between now and year end, according to Wells Fargo Investment Institute (WFII) strategists on Tuesday, is to position portfolios for policy and geopolitical risk, such as by reducing exposure to consumer discretionary stocks and increasing exposure to utilities.

"The level of tariffs is likely to persist even though we're going through some negotiations right now," Tracie McMillion, WFII's head of global asset allocation strategy, said during the firm's 2025 mid-year outlook call.

"Consumer discretionary is one of the sectors that could be exposed to tariffs, so we're reducing exposure there," she said.

Sameer Samana, head of global equities and real assets for WFII, said: "It's at least somewhat reflective of the administration's policy."

"It's going to lead to fewer cheap goods, and I think the consumer will struggle with that," he said.

Trade talks between the U.S. and China stretched through a second full day and into the evening in London on Tuesday as the two superpowers pushed for a breakthrough on dueling export controls that have threatened to unravel a delicate tariff truce.

Utilities, McMillion said, are "more domestically focused and a more traditional defensive sector."

She also said, "with utilities, we see the potential for AI to drive growth there."

Commercial and professional services are two areas that could have less exposure to tariffs, she said.

At the same time, "aerospace and defense are areas where we think there could be a benefit from geopolitical uncertainties," she said.

Another strategy the firm recommends is to focus on quality and diversifying assets.

"We favor U.S. large caps and mid-caps because of their strong balance sheets and ability to increase earnings," McMillion said.

In addition, she said, sectors such as information technology and communication services "are very high-quality" and "those should be candidates for purchase on any pullbacks in the market."

WFII sees the S&P 500 index .SPX ending this year at 6,000 but it sees the index rising to 6,500 by year-end 2026.

(Caroline Valetkevitch)

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