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. That stronger-than-expected inflation figure has prompted investors to rethink sector weightings, pushing money toward industries that can better withstand or benefit from inflation and away from those that face fixed revenue pressures.
The Core PCE number revived talk of a strategic shift into inflation-linked sectors such as construction and engineering and away from inflation-sensitive sectors like healthcare services. Market participants point to a mix of lingering tariff effects from the previous administration and ongoing supply chain bottlenecks as reasons inflation has not cooled as fast as expected.
Construction and engineering firms are seen as better able to protect margins because they often have the ability to pass higher material and labor costs to clients. Names tied to the sector include heavy equipment manufacturers and large engineering contractors. Support from public spending also matters: roughly $670 billion in combined federal and state infrastructure spending — derived from a $550 billion federal allocation through the 2022 Bipartisan Infrastructure Law and about $120 billion in state-level bond issuances — provides a steady demand backdrop.
Historical comparisons show construction stocks have performed well during past inflationary shocks, outperforming the broad market by about 18% in episodes such as the 1970s stagflation period and the 2021–2022 surge. A popular construction ETF recorded a sharp move earlier this summer, with the iShares U.S. Construction Producers ETF registering an 8% surge in June 2025 after inflation data drew attention back to the sector.
Healthcare providers are finding it harder to pass on rising costs. Public payers tie reimbursements to fixed schedules, and many private insurers have resisted large premium hikes, limiting providers’ pricing power. At the same time, labor costs in healthcare rose about 6.2% year-over-year, and supply delays for items like personal protective equipment and some pharmaceuticals have further squeezed margins. Short-term market moves after earlier inflation readings showed the healthcare services group lagging the broader market by roughly 2.8% on average over 60-day windows.
Several big healthcare and drug company stocks saw small declines after prior inflation updates, reflecting investor worries about margin pressure in the sector.
Federal Reserve commentary suggesting potential rate cuts in the fourth quarter of 2025 has added to the construction case. Lower rates would reduce borrowing costs for both public projects and private builders, enhancing the benefit of cost-pass-through arrangements and possibly amplifying outperformance by the construction group.
The world’s largest sovereign wealth fund, managed by Norway and valued at about $2 trillion, has sold its stakes in a major heavy equipment maker and five Israeli banks following an ethics review. The fund cited concerns that the equipment maker’s products were being used in ways that could lead to serious violations in conflict settings and said it had decided the company had not taken sufficient steps to prevent such use. Before the sale, the fund held roughly 1.17% of that equipment maker, valued at about $2.1 billion as of the end of June.
The five Israeli banking stakes were sold after the fund’s ethics advisers concluded the lenders had provided services that enabled construction in settlements seen as violating international law. The combined value of the fund’s holdings in the five banks was about $661 million.
These moves add a geopolitical dimension to the investment outlook for construction supply firms and financial institutions tied to regional development.
The heavy equipment maker at the center of the fund’s divestment reported a 7% year-over-year decline in construction-related sales. Regional revenue showed slippage in most areas, with North America down about 11%, Europe, Africa and the Middle East down about 15%, and Asia Pacific down about 12%. Latin America was a bright spot with revenue up roughly 12%.
Company finance leaders said price gains that boosted margins since early 2022 are moderating and expected price realization to trend lower into the fourth quarter of 2025. The firm indicated the weaker trend in construction sales could continue into the coming quarter, though executives noted government infrastructure funding from the IIJA should keep a base of demand healthy. Industry tracking groups report that around 27% of a $348 billion portion of IIJA funding had been spent by August 2024, with nearly half already committed, leaving substantial unspent funds that could support projects in the quarters ahead.
The latest Core PCE reading has shifted the conversation toward sectors that can handle inflation and away from areas with fixed reimbursements or weak pricing power. For investors, that means many are choosing to overweight construction and infrastructure-related names and underweight healthcare services while monitoring Fed moves and geopolitics that could affect equipment makers and regional banks.
The Core PCE is a key inflation measure that strips out food and energy. A 2.9% year-over-year rise indicates inflation is running above many policymakers’ comfort zones and can influence interest-rate expectations and sector performance.
Construction firms often can pass higher material and labor costs to clients through contracts or price adjustments. Public infrastructure spending and the potential for cheaper financing if rates fall further also support demand.
Many revenues in healthcare are set by fixed government programs or constrained by insurer pricing, limiting the sector’s ability to raise prices as costs rise. Rising labor and supply costs have squeezed margins.
The fund divested holdings in a major equipment maker and five Israeli banks after an ethics review tied to the use of equipment and financing linked to construction in disputed areas. The moves matter because the fund is large and its actions can influence other investors and public debate about corporate conduct.
Many investors are reviewing allocations to favor inflation-linked sectors such as construction and engineering while trimming exposure to sectors with limited pricing power like certain healthcare services. Individual decisions should reflect risk tolerance, time horizon and portfolio goals.
| Feature | Detail |
|---|---|
| Core PCE (July 2025) | 2.9% year-over-year, highest in five months |
| Investor tilt | Overweight construction/engineering; underweight healthcare services |
| Public infrastructure support | $670 billion combined federal and state funding (IIJA $550B + $120B state bonds) |
| Construction ETF reaction | iShares U.S. Construction Producers ETF rose about 8% in June 2025 |
| Healthcare pressures | Labor costs up 6.2% y/y; limited pass-through due to fixed reimbursements and insurer resistance |
| Sovereign fund action | Norway divested a major equipment maker stake (~$2.1B) and five Israeli banks (~$661M) over ethics concerns |
| Equipment maker sales | Construction-related sales fell 7% y/y; regional revenue declines: NA -11%, EAME -15%, APAC -12%, LATAM +12% |
| Outlook | Potential Fed rate cuts in Q4 2025 could lower financing costs and favor construction demand |
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