Regime call: Higher-for-longer, re-armament, and health-care cash flows

A different—but complementary—three-sector portfolio suits investors who want late-cycle resilience with upside. The macro mix: (1) higher-for-longer policy rates and sticky services inflation, (2) elevated geopolitical risk and NATO re-armament, and (3) health-care innovation monetized at scale (GLP-1s). That trifecta argues for Energy, Defense/Aerospace, and Healthcare as the top sectors to trade through the cycle.

Sector 1 — Energy (XLE core; XOP for E&Ps; OIH for services)

Thesis. Oil’s near-term tape is choppy, but the structural balance supports owning energy on drawdowns. Global demand grows modestly; non-OPEC supply dynamics and OPEC+ policy set the price distribution; and shareholder-friendly capital returns remain a floor for equities.

Catalysts.

• Demand: The IEA’s August 2025 report pegs 2025 demand growth at ~0.68 mb/d, reaching ~104.4 mb/d, with most incremental barrels coming from non-OECD. It’s slower than 2021–23, but still positive. 
• Tape vs. trend: Crude recently hit short-term lows on supply-guidance headlines, illustrating why trading the sector via ETFs (versus stock picking) can be attractive when macro news overwhelm micro. 

How to express.

• Core ETF: Energy Select Sector SPDR (XLE) for integrateds and diversified energy beta.
• High-beta sleeve: SPDR S&P Oil & Gas E&P (XOP) equal-weights independents; add VanEck Oil Services (OIH) on capex upswings.
• Risk tools: Collar XLE around OPEC meetings; pair with a small long-utilities (XLU) sleeve as a load-growth hedge if you want cross-energy exposure.

Risk map. OPEC+ policy surprises, shale responsiveness, geopolitical shocks. Use staged entries around macro dates and keep a signal overlay (term structure/backwardation, inventory trends) to scale risk.

Sector 2 — Defense & Aerospace (ITA, XAR, PPA)

Thesis. Europe’s re-armament and multi-theater deterrence are catalyzing a decade-long procurement cycle—ammunition, air defense, drones, ships, and space. Budget pathways are increasingly codified, with NATO raising its sights beyond the old 2% GDP yardstick.

Catalysts.

• Budgets: The U.S. DoD’s FY-2025 request was ~$850B (with enacted authority via CRs later summarized by CRS). This anchors a multiyear modernization pipeline across domains. 
• NATO commitments: The Hague Summit set a new spending benchmark—Allies ultimately targeting 5% of GDP on core defense/security outlays by 2035, with several sources noting an interim emphasis on 3.5% for pure defense and many members already clearing the older 2% threshold. The direction of travel is up and broad-based. 

How to express.

• Core ETF: iShares U.S. Aerospace & Defense (ITA) for prime contractors and large subs.
• Equal-weight tilt: SPDR S&P Aerospace & Defense (XAR) reduces single-name dominance and captures Tier-2 suppliers.
• Pairings: Add Procure Space (UFO) or similar if you want C4ISR/space exposure; keep sizing modest.

Risk map. Political cycles and export-license frictions can delay awards. Hedge via pairs (long ITA vs. short broader industrials) when PMIs roll over; keep cash buffers around election and summit windows.

Sector 3 — Healthcare, with a GLP-1 barbell (XLV + XBI)

Thesis. Healthcare provides defensive cash flow and offensive optionality. The GLP-1 revolution (obesity and diabetes) has reshaped growth runways for big pharma while reviving biotech funding and exit prospects. But pricing, access, and manufacturing complexity argue for a barbell: a broad healthcare core plus an equal-weight biotech sleeve.

Catalysts.

• Market size: Street and industry estimates for global weight-loss/obesity drugs now span ~$95–150B by 2030, with IQVIA citing ~$131B by 2028 and Evaluate projecting GLP-1s near 9% of all Rx sales by 2030. Range-bound forecasts underscore both upside and policy/price risk—perfect for trading via ETFs rather than single names. 
• Company cadence: Novo’s mid-year investor materials and sector trackers show rapid GLP-1 prescription growth into mid-2025; supply chains are being expanded aggressively, while oral candidates progress. 

How to express.

• Core ETF: Health Care Select Sector SPDR (XLV) for durable earnings and managed-care/pharma/device balance.
• Growth kicker: SPDR S&P Biotech (XBI)—modified equal-weight—to access pipeline beta without single-name risk. (XBI’s equal-weighting is explicitly documented by SSGA.) 

Risk map. U.S. pricing reform, GLP-1 reimbursement/coverage, and clinical readouts. Manage via position-sizing (XBI smaller than XLV) and event calendars; consider a put spread into pivotal FDA dates.

Putting it together: A late-cycle three-pack you can actually trade

• Allocation sketch: 35 XLE / 30 ITA+XAR / 35 XLV (with 10–15 of that in XBI). This blends inflation resilience (energy), geopolitically-driven secular growth (defense), and cash-flow defensiveness plus upside (healthcare/biotech).
• Signals to watch:
  • Energy: inventory draws, OPEC meeting language, and timespreads vs. IEA monthly demand revisions. 
  • Defense: NATO implementation progress and U.S./EU budget votes; track award backlogs. 
  • Healthcare: GLP-1 scripts/supply updates, payer coverage shifts, and oral GLP-1 trial milestones; reconcile hype vs. revised sell-side TAMs. 

What if?

• Oil slumps on supply beats: Rotate XLE weight to refiners/chemical plays or temporarily fund energy with utilities (XLU) until balances tighten again. 
• Defense détente headlines: Keep core ITA but hedge via short XLI (beta-match) into summits; history shows procurement cycles persist beyond news cycles given multi-year contracts. 
• GLP-1 pricing pressure: Let XLV do the heavy lifting and keep XBI lean; the barbell reduces dependence on a single policy path. 

Bottom line: In a world of slow-growth, higher-for-longer, persistent geopolitical risk, and health-care innovation, Energy + Defense/Aerospace + Healthcare is a robust late-cycle trio. Trade it with discipline: scale in around macro dates, keep options overlays for tail risks, and let the ETF wrappers do the heavy diversification work.