U.S. Consumer Credit Expansion: A Catalyst for Sector Rotation Toward Construction and Engineering

The U.S. consumer credit landscape in 2025 has defied expectations, with a surprise stabilization and measured growth that signals a shift in investor sentiment. While delinquency rates in sectors like auto loans and federal student loans remain elevated, the broader credit environment is showing resilience. This divergence has sparked a subtle but significant sector rotation: capital is flowing toward cyclicals like construction and engineering, while defensives such as pharmaceuticals face headwinds. For investors, understanding this dynamic is critical to navigating the evolving market.

The Case for Construction and Engineering

The construction and engineering (E&C) sector is emerging as a standout beneficiary of the current credit cycle. Government-driven infrastructure spending, technological adoption, and easing monetary policy are creating a tailwind for firms in this space.

1. Policy-Driven Momentum
The Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and CHIPS and Science Act have injected over $550 billion into U.S. infrastructure and manufacturing. These programs are fueling demand for nonresidential construction, particularly in energy transition projects, data centers, and semiconductor manufacturing. For example, construction spending in Q2 2025 crossed the $2 trillion threshold, with the Dodge Momentum Index (DMI) rising steadily as developers regain confidence.

2. Inflation-Linked Contracts as a Buffer
Over 60% of infrastructure contracts now include cost-of-living adjustments, insulating firms from input cost volatility. This structural advantage is evident in companies like AECOM (ACM) and Fluor Corp. (FLR), which have leveraged long-term, fixed-price agreements to maintain margins despite rising material costs.

3. Technological Integration
The sector is accelerating the adoption of Building Information Modeling (BIM), robotics, and AI-driven automation to offset labor shortages. A mechanical and electrical construction firm, for instance, doubled its BIM designers and invested in prefabrication technologies, boosting productivity by 20%.

The Pharmaceutical Sector's Challenges

In contrast, the pharmaceuticals sector is grappling with a complex mix of regulatory pressures, cost constraints, and macroeconomic headwinds. While healthcare remains a defensive asset, its relative underperformance in 2025 highlights the sector's vulnerability to shifting dynamics.

1. Regulatory and Pricing Pressures
The White House's global tariff policy and the implementation of the most favored nation (MFN) pricing executive order have created uncertainty for pharmaceutical firms. These measures threaten to compress margins, particularly for companies reliant on international supply chains. The sector's trailing 12-month return of -4.7% reflects this strain, with biotechnology subsectors facing the most acute challenges.

2. Interest Rate Sensitivity
Pharmaceuticals, like other long-duration industries, are sensitive to interest rate changes. Elevated rates reduce the present value of future cash flows, making R&D-heavy firms less attractive. This is compounded by the sector's reliance on capital-intensive innovation cycles, which struggle to justify valuations in a high-rate environment.

3. Investor Sentiment Shifts
Activist investors are pushing pharmaceutical companies to streamline portfolios and prioritize capital discipline. This has led to increased divestitures and a focus on core assets, but it also signals a broader reallocation of capital away from the sector.

Actionable Investment Strategies

The divergence between construction and pharmaceuticals presents clear opportunities for investors seeking to align with macroeconomic trends.

1. Overweight Construction/Engineering
- ETF Exposure: Allocate to the iShares U.S. Construction ETF (ITB), which has outperformed the S&P 500 by 15–35% during past inflationary cycles.
- Individual Stocks: Target firms with strong government contracts and technological integration, such as AECOM (ACM) and Fluor Corp. (FLR).
- Private Equity Involvement: Consider private equity-backed construction firms expanding into clean energy and data center infrastructure.

2. Underweight Pharmaceuticals
- Defensive Positioning: Maintain a cautious stance on pharmaceuticals unless investing in companies with robust government partnerships or digital health innovations.
- Biotech Caution: Avoid overexposure to biotechnology firms with weak fundamentals, as earnings estimates remain under pressure.

3. Monitor Policy and Tariff Developments
- Track changes in federal infrastructure spending and trade policies, which could further tilt capital toward construction.
- Stay alert to pharmaceutical sector reforms, such as drug pricing legislation, which may create short-term volatility.

Conclusion

The U.S. consumer credit expansion of 2025 is reshaping sector dynamics, with construction and engineering emerging as a compelling long-term play. While pharmaceuticals retain their defensive appeal, their structural challenges and regulatory risks make them a less attractive destination for capital in the current environment. By prioritizing cyclicals and leveraging policy tailwinds, investors can position their portfolios to capitalize on this rotation. As always, vigilance to macroeconomic and policy shifts will be key to sustaining returns in an evolving landscape.