Active construction site with financial charts illustrating market rotation toward construction amid rising inflation.
United States, August 31, 2025
A stronger-than-expected Core PCE inflation reading pushed investors to reweight portfolios toward construction and engineering and away from sectors with limited pricing power like healthcare services. Construction firms can better pass through rising material and labor costs, and public infrastructure spending provides steady demand. The market rotation has been reinforced by expectations of potential Fed easing later in the year, which could lower financing costs. Separately, Norway’s large sovereign fund sold stakes in a major heavy equipment maker and five Israeli banks after an ethics review, adding a geopolitical dimension to investor decisions.
The U.S. Core PCE Price Index rose to 2.9% year-over-year in July 2025, the highest reading in five months, and that uptick is driving investors to rotate money into sectors that tend to hold up during inflation. The immediate market reaction has been a move toward construction and engineering stocks and away from sectors seen as sensitive to rising costs, especially healthcare services.
Analysts point to two main reasons for the renewed interest in construction firms. First, construction and engineering companies can often pass higher material and labor costs on to customers, a trait called cost-pass-through capability. Second, the sector is supported by a multi-year spending stream from government programs: about $550 billion from the 2022 infrastructure law for roads, bridges and housing, plus roughly $120 billion a year in state-level infrastructure bond issuances, totaling about $670 billion of support for federal and state construction activity.
Market behavior has already reflected this shift. The iShares U.S. Construction Producers ETF (ITB) jumped about 8% in June 2025 after inflation data releases earlier in the summer. Backtests cited by strategists show construction stocks outperforming the broader market by about 18% during past inflation shocks, including episodes in the 1970s and the 2021–2022 surge.
Healthcare services are under pressure because providers lack the same flexibility to raise prices. Public reimbursement rates from Medicare and Medicaid are largely fixed and private insurers have been reluctant to push through large premium increases. That mismatch has squeezed margins as labor costs in healthcare rose roughly 6.2% year-over-year and supply chain problems for items like personal protective equipment and certain drugs have lifted input costs.
Historical analysis referenced by market watchers shows healthcare services tend to lag the S&P 500 by an average of about 2.8% over the 60 days after inflation spikes. Some large healthcare-related stocks experienced immediate downside after earlier inflation prints in June 2025 as investors reallocated funds.
Federal Reserve signals that rate cuts could arrive in Q4 2025 add another tailwind for construction. Lower short-term rates would reduce borrowing costs for builders and local governments, amplifying the advantage of firms that can combine cost-pass-through with access to cheaper financing.
The world’s largest sovereign wealth fund, valued at about $2 trillion, has removed several holdings as part of an ethics review linked to conflict-related concerns. The fund sold its stake in a major construction equipment maker after concluding the company’s products were being used in ways that posed an unacceptable risk of contributing to serious violations of rights in war or conflict settings. Before the sale, the fund held roughly 1.17% of that equipment maker, a stake valued at about $2.1 billion as of June 30.
The fund also exited positions in five Israeli banks, which together represented about $661 million of exposure. The ethics review concluded these banks provided financial services that were instrumental to construction activity in settlements that have been judged as violating international law by international bodies. The divestments are part of an ongoing review tied to developments in Gaza and the occupied West Bank.
The equipment maker that the fund divested from reported a 7% year-over-year drop in construction-related sales. Regional performance was uneven: revenue fell about 11% in North America, 15% in Europe, Africa and the Middle East, and 12% in Asia Pacific, while revenue in Latin America rose about 12%. The company flagged that price realization — the portion of price increases that translate into profit — has been moderating and is expected to trend lower in the fourth quarter.
Company executives said government infrastructure spending tied to the 2022 law remains a positive factor and noted that a sizable portion of the program’s funds has already been committed or spent, which should support demand in coming quarters. Still, the firm expects lower sales in its construction industries segment to continue into the fourth quarter.
Given the inflation picture and the Fed’s tentative timeline for rate cuts, some strategists recommend overweighting inflation-linked sectors like construction and engineering and underweighting inflation-sensitive sectors such as healthcare services. The idea is to tilt portfolios toward companies with pricing power and exposure to public infrastructure spending while reducing exposure to sectors locked into fixed reimbursements and rising wage bills.
The 2.9% Core PCE reading underscores a persistent inflation backdrop that observers partly trace to tariffs enacted during the prior administration and ongoing supply chain bottlenecks. The combination of continued public infrastructure funding, potential lower rates later this year, and the structural ability of certain firms to pass costs to customers is pushing money into construction names even as some large equipment makers report near-term softness.
The Core PCE Price Index measures price changes for goods and services excluding food and energy. It is the Federal Reserve’s preferred inflation gauge and helps guide interest-rate policy decisions.
Construction firms often have the ability to pass higher material and labor costs onto clients, and they stand to gain from large public infrastructure spending programs and cheaper financing if rates fall.
Healthcare providers face fixed reimbursement rates from public payers, limited premium increases from private insurers, higher labor costs, and medical supply delays — all of which squeeze margins when inflation rises.
The fund’s ethics review found an unacceptable risk that some companies’ products or services were being used in ways that could contribute to serious violations of rights in conflict settings, and it removed holdings accordingly.
Investors may consider increasing exposure to sectors that benefit from inflation and infrastructure spending while reducing exposure to sectors that cannot easily raise prices. Any changes should fit an investor’s risk profile and time horizon.
| Feature | Detail |
|---|---|
| Core PCE (July 2025) | 2.9% year-over-year |
| Sector rotation | Move toward construction/engineering; away from healthcare services |
| Infrastructure funding | $550B federal IIJA allocation + $120B state bonds = $670B support |
| ETF reaction | iShares U.S. Construction Producers ETF (ITB) rose ~8% in June 2025 |
| Sovereign fund actions | Divested a major equipment maker and five Israeli banks; prior stake in the equipment maker ~1.17% worth $2.1B |
| Equipment maker sales | Construction-related sales down ~7% YoY; regional revenue declines in North America, EAME, Asia Pacific; Latin America up ~12% |
| Healthcare pressures | Labor costs +6.2% YoY, fixed reimbursements, supply bottlenecks |
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