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 Personal Consumption Expenditures (PCE) price index rose to 2.9% year-over-year in July 2025, the highest reading in five months, prompting a swift rethink among investors and portfolio managers. The data has accelerated a strategic move into sectors that historically hold up during inflationary periods, notably construction and engineering, while prompting caution about healthcare services stocks seen as more sensitive to rising costs.
The stronger-than-expected Core PCE print has revived interest in companies that can pass higher material and labor costs on to customers and that stand to gain from heavy public spending. Analysts point to a combined $670 billion in ongoing federal and state infrastructure support — derived from a $550 billion federal allocation under the 2022 Bipartisan Infrastructure Law and roughly $120 billion in annual state-level bond issuances — as underpinning demand for building, roads and housing work for years ahead.
Historical backtests show construction stocks outperforming the broader market by about 18% during prior inflation shocks, including the 1970s and the 2021–2022 surge. The iShares U.S. Construction Producers ETF (ITB) jumped 8% in June 2025 after earlier inflation signals, and market advisers now recommend overweighting construction/infrastructure names while trimming exposure to inflation-sensitive healthcare providers as the central bank signals the possibility of interest-rate cuts in the fourth quarter of 2025.
The healthcare services sector is described by market analysts as struggling to adjust to sustained inflation. Fixed reimbursement rates from government programs such as Medicare and Medicaid limit providers’ ability to raise revenue, and private insurers have largely resisted premium increases, making it difficult for hospitals and clinics to offset rising costs. Labor costs in healthcare climbed by about 6.2% year-over-year, while supply chain bottlenecks for medical supplies such as personal protective equipment and some pharmaceuticals have further squeezed margins.
Stocks of major healthcare names moved lower following earlier inflation signals, with a leading managed-care company down about 1.2% and a major pharmaceutical company off about 0.8% in the immediate reaction. Historical studies referenced by market advisers show healthcare services underperforming the S&P 500 by about 2.8% on average in 60-day windows after inflationary shocks.
In a separate development that has implications for construction-sector names, the world’s largest sovereign wealth fund, valued at roughly $2 trillion, has divested its holdings in heavy-equipment maker Caterpillar and five Israeli banks. The fund’s ethics council concluded the company’s equipment had been used in ways that carry an unacceptable risk of contributing to serious violations of individual rights in conflict settings, and found that the manufacturer had not taken sufficient measures to prevent such use.
The fund also sold its stakes in five Israeli banks, finding that the banks had provided financial services seen as facilitating construction activity in Israeli settlements in the West Bank and East Jerusalem. Those stakes in the banks were valued at about $661 million combined. The stake in the heavy-equipment maker had been roughly 1.17% of the company and was valued locally at about $2.1 billion as of June 30.
The divestments follow international legal rulings and diplomatic pressure related to settlement activity. A recent joint statement signed by 21 countries criticized a specific settlement plan for a tract known as E1, which envisions roughly 3,400 new homes, and international courts have previously found many settlements to be in violation of international law.
The heavy-equipment maker said construction-related sales fell about 7% year-over-year. Regional results showed revenue declines of roughly 11% in North America, 15% in Europe, Africa and the Middle East, and 12% in Asia Pacific, while Latin America saw about a 12% increase. Company executives signaled that price realization — the ability to maintain higher selling prices — is expected to ease into the fourth quarter, noting that strong price gains since early 2022 began to moderate in the second half of the year and that moderation continued into the third quarter.
Despite near-term softness, company leaders pointed to the long-term support from federal infrastructure funding under the IIJA, noting that a share of the program’s total funding has already been spent and a larger share committed, which should sustain project activity and dealer workloads in coming quarters.
The convergence of persistent inflation, large public infrastructure programs, and central bank talk of possible rate cuts later in 2025 creates a backdrop where construction and engineering firms could gain both pricing power and cheaper financing. Investors watching for rotation are likely to favor companies with strong cost-pass-through abilities, solid order backlogs and exposure to government-funded projects.
At the same time, any escalation of geopolitical or legal scrutiny around corporate involvement in conflict zones can quickly alter investment flows, as demonstrated by the sovereign fund’s recent divestments. Near-term signals to monitor include upcoming PCE releases, central bank communications about timing for rate reductions, quarterly earnings from major construction and healthcare firms, and further developments around international legal and diplomatic actions that affect corporate operations.
Core PCE measures underlying inflation by excluding food and energy. A 2.9% annual pace signals persistent inflation above many central bank targets and can push investors toward sectors that hold up during inflation, such as construction and engineering.
Construction firms often can pass higher input costs to customers through contracts and change orders. Large public infrastructure programs and the prospect of cheaper financing if rates fall can sustain demand and margins.
Many healthcare providers face fixed government reimbursements and limited ability to raise private-pay rates, while labor and supply costs have been rising. Those constraints make it harder to preserve margins in an inflationary environment.
The fund divested stakes in a major heavy-equipment manufacturer and five Israeli banks after an ethics review found links between those companies’ products or services and activities that could contribute to violations in conflict areas.
Many advisers suggest overweighting construction and infrastructure-related names and underweighting healthcare services while monitoring central bank policy, infrastructure spending progress and geopolitical risk.
| Feature | Detail |
|---|---|
| Core PCE (July 2025) | 2.9% year-over-year — highest in five months |
| Suggested sector moves | Overweight construction/engineering; underweight healthcare services |
| Public infrastructure support | $670 billion combined (IIJA federal allocation + state bond issuances) |
| Norwegian fund action | Divested a major heavy-equipment maker and five Israeli banks on ethics grounds |
| Caterpillar sales trend | Construction-related sales down 7% YoY; regional revenues mixed |
| Healthcare pressure points | Fixed reimbursements, labor +6.2% YoY, supply bottlenecks |
| ETF reaction | Construction ETF (ITB) rose about 8% in June 2025 |
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