Navigating the Current Business Cycle Phase and Its Implications for Equity Sector Rotation

As of November 2025, the U.S. economy remains in an expansionary phase, albeit with signs of fragility. According to a probabilistic business cycle model, there is a 55% probability the economy is in expansion and a 45% probability it is in a slowdown. While growth remains positive, key indicators such as the Conference Board Leading Economic Index® (LEI) signal decelerating momentum. The LEI fell by 0.3% in September 2025 to 98.3, marking a second consecutive decline and a 2.1% drop over six months. This weakening is attributed to declining consumer and business confidence, as well as softness in manufacturing orders. However, consumer spending and a stable unemployment rate of 4.2% suggest the expansion is not yet in jeopardy.

For investors, this mid-to-late expansion phase demands a recalibration of equity sector rotation strategies. Historically, mid-to-late cycles favor sectors like technology, healthcare, and materials. Yet, 2025 has seen a notable deviation: growth stocks, particularly in Big Tech, have underperformed, while value stocks and international equities have surged. The Nasdaq, a proxy for growth, was down over 6% as of early 2025, while the Russell 1000 Value index rose 1.89% and the MSCI EAFE index gained 11.21%. This shift reflects broader market participation and a reallocation toward sectors better positioned in a high-rate environment.

Strategic Sector Allocation in a Shifting Landscape

The 2025 rotation underscores the importance of adapting to macroeconomic realities. Cooling inflation and the Federal Reserve's pause on rate hikes have spurred demand for defensive and value-oriented sectors. Utilities, consumer staples, and industrials-typically late-cycle performers-are gaining traction. For example, utilities and consumer staples benefit from their stable cash flows in a high-interest-rate environment, while industrials align with resilient services-sector growth ISM Services Index at 50.1 in July 2025.

International equities also present compelling opportunities. The MSCI EAFE index's 11.21% gain highlights the appeal of markets like the UK, where traditional sectors such as banking and energy are outperforming. This trend is likely to persist if global economic fundamentals remain robust, despite the U.S. economy's uneven recovery.

Navigating Risks and Opportunities

Investors must remain vigilant about potential headwinds. The manufacturing sector's contraction (ISM Manufacturing Index at 49.8 in July 2025) and the LEI's continued decline signal vulnerabilities. A strategic approach should balance exposure to growth and value sectors while hedging against recessionary risks. Defensive sectors like healthcare and consumer staples offer resilience, while energy and industrials could benefit from durable demand.

Moreover, technical indicators such as the yield curve and consumer confidence provide critical signals. A flattening yield curve or inverted curve could signal the need to pivot toward defensive allocations. Similarly, a sustained drop in the LEI or a rise in unemployment could necessitate a shift to cash or fixed income.

Conclusion

The mid-to-late expansion phase of 2025 demands a nuanced, adaptive strategy. While historical patterns suggest favoring technology and materials, current conditions favor value stocks, international equities, and defensive sectors. By aligning allocations with macroeconomic signals and sector-specific fundamentals, investors can navigate the complexities of this phase while positioning for long-term growth.