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, prompting investors to rethink which industries should lead portfolios through the rest of the year. The inflation reading has pushed money toward inflation-linked sectors such as construction and engineering, while sectors that struggle to pass on higher costs, like healthcare services, are being viewed less favorably.
The stronger Core PCE print reinforced expectations of a persistent inflation backdrop, which analysts link in part to earlier tariffs and ongoing supply chain bottlenecks. That has revived talk of a strategic rotation into sectors that can shield margins from rising costs. Construction and engineering firms are seen as beneficiaries because many can pass higher material and labor costs to clients, and they also stand to gain if the Federal Reserve moves toward rate cuts planned for Q4 2025 by easing borrowing costs.
Policy support also underpins the case for construction. The 2022 Bipartisan Infrastructure Law allocated $550 billion for roads, bridges and housing, and state-level infrastructure bond issuances add about $120 billion annually, bringing a combined public funding picture near $670 billion for federal and state infrastructure work. Historical backtests show construction stocks outpaced the S&P 500 by about 18% during past inflation shocks, such as the 1970s and the 2021–2022 surge, boosting investor confidence in the sector now.
Market action has already followed: a U.S. construction ETF rose notably after the inflation data, with the iShares U.S. Construction Producers ETF (ITB) up about 8% in June 2025 following the Core PCE release.
By contrast, healthcare services are seen as inflation-sensitive. Providers face fixed reimbursement rates from Medicare and Medicaid that limit their ability to raise prices. Private insurers have generally been slow to accept big premium jumps, leaving providers with a narrow path to offset rising costs. Labor expenses in healthcare rose roughly 6.2% year-over-year, and supply chain problems for items like personal protective equipment and some medicines have further squeezed margins.
Short-term market reactions illustrate the strain: major healthcare and drug companies saw stock declines in the wake of recent data, and historical tests suggest healthcare services underperform the S&P 500 by about 2.8% on average during the 60-day window after inflationary shocks. The market message for many investors: consider overweighting construction and infrastructure names and underweighting healthcare providers as a defensive move against persistent inflation.
Adding a political and reputational angle to market moves, Norway’s sovereign wealth fund, the world’s largest at about $2 trillion, has divested from a major construction equipment maker and five Israeli banks following an ethical review related to the conflicts in Gaza and the occupied West Bank.
The fund removed its stake in the heavy equipment company after its ethics council concluded the company’s machinery had been used in harmful ways in conflict settings and that the company had not taken adequate steps to prevent such use. Prior to divestment, the fund owned roughly 1.17% of that company, valued at about $2.1 billion as of June 30. The fund also sold holdings in five Israeli banks, representing combined stakes near $661 million, after finding that financial services had enabled construction activity in settlements judged to be in breach of international law.
The heavy equipment maker at the center of the sovereign fund’s action reported that construction-related sales fell about 7% year-over-year. Regional revenues fell in much of the world: North America declined roughly 11%, Europe/Africa/Middle East dropped about 15%, and Asia Pacific slid about 12%. Latin America was an outlier with revenue up near 12%.
Company finance leaders signaled that price gains on equipment have begun to moderate and are likely to trend lower into the fourth quarter as demand normalizes. At the same time, firm executives pointed to public infrastructure funding under the IIJA as a stabilizing factor, noting that a notable share of the total program has already been spent or committed and that remaining funds could sustain demand for heavy equipment over coming quarters.
The combined picture — a higher Core PCE reading, potential Fed rate moves later in the year, large public infrastructure programs and active ethical scrutiny by big global investors — suggests a two-part market shift: capital flows into construction and related industries that can absorb inflation, and caution around healthcare providers that face fixed payments and rising costs. For construction firms, easier financing if rates fall in Q4 2025 could amplify gains. For healthcare, elevated labor costs and limited ability to raise revenues create near-term margin pressure.
The July Core PCE print is reshaping sector bets. Construction and engineering stand to benefit from cost-pass-through power, large public spending programs and potential cheaper finance, while healthcare services face headwinds from fixed reimbursement and rising costs. At the same time, ethical and geopolitical factors are affecting investor holdings, as shown by major divestments from a top sovereign fund.
The Core PCE measures inflation excluding food and energy. A 2.9% yearly rise shows underlying inflation is above typical central bank targets and may change investor expectations about interest rates and sector performance.
Construction firms can often pass higher material and labor costs to customers and stand to benefit from large public infrastructure spending and potential rate cuts that lower borrowing costs.
Federal allocations from the infrastructure law and state bond programs create long-term projects for roads, bridges and housing, which sustain demand for equipment and construction services.
Many healthcare providers work under fixed government reimbursement rates and face resistance to premium hikes from private insurers, while labor and supply costs are rising, squeezing margins.
The fund’s ethics review concluded certain products and financial services contributed to actions that violate international humanitarian law, prompting sales of stakes in a heavy equipment maker and several banks.
| Topic | Key facts | Market impact |
|---|---|---|
| Core PCE | 2.9% y/y in July 2025; highest in five months | Boosts interest in inflation-linked sectors; raises Fed watchfulness |
| Construction support | $550B federal + $120B state = $670B in infrastructure funding | Increased demand for equipment and contractors; ETF ITB surged 8% in June 2025 |
| Healthcare pressures | Labor costs up 6.2% y/y; fixed reimbursements limit price moves | Potential underperformance; historical 60-day lag vs S&P -2.8% |
| Norway fund divestments | Sold stake in large equipment maker (~$2.1B holding) and five Israeli banks (~$661M combined) | Raises ethical and political risk considerations for investors |
| Caterpillar results | Construction sales down 7% y/y; regional revenue falls except Latin America up 12% | Short-term pressure on shares; longer-term demand tied to IIJA funding |
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