U.S. CB Consumer Confidence Surpasses Forecasts: Sector Rotation Opportunities in Construction and Engineering

The U.S. Conference Board Consumer Confidence Index (CCI) for July 2025 rose to 97.2, exceeding forecasts and signaling a modest recovery in consumer sentiment. This increase, driven by easing inflation expectations and improved short-term economic outlooks, highlights a critical shift in demand dynamics toward housing and infrastructure. For investors, this presents a compelling case for sector rotation, favoring construction and engineering firms while recalibrating exposure to defensive sectors like food products.

The CCI as a Barometer for Sector Rotation

The CCI's July rebound—from 95.2 in June—reflects a stabilization in consumer sentiment, albeit with lingering challenges. The Expectations Index climbed to 74.4, though it remains below the 80 threshold historically linked to recessionary signals. Meanwhile, the Present Situation Index fell to 131.5, underscoring ongoing labor market concerns. These mixed signals suggest a nuanced economic environment: consumers are cautiously optimistic about the future but remain wary of job scarcity and inflation.

The key takeaway for investors lies in the interplay between inflation expectations and infrastructure demand. With 12-month inflation expectations dropping to 5.8% from 7.0% in April, the risk of margin compression for sectors tied to discretionary spending has diminished. Simultaneously, government-backed infrastructure spending—such as the $550 billion Bipartisan Infrastructure Law and $50 billion grid modernization plan—has created a tailwind for construction and engineering firms. Over 60% of infrastructure contracts now include cost-of-living adjustments, insulating firms like AECOM (ACM) and Fluor Corp. (FLR) from input cost volatility.

Historical Backtesting: Construction vs. Food Products

Backtested data from 2010 to 2025 reveals a stark divergence between construction and food products sectors during inflationary cycles. The construction ETF (ITB) has historically outperformed the S&P 500 by 15–20% during periods of rising inflation and infrastructure spending. For example:
- 1970s Stagflation: Construction stocks gained 20% annually, leveraging long-term contracts and cost-of-living adjustments.
- 2008 Inflation Spike: ITB surged 35% versus the S&P 500's 15% return.
- 2025 Context: With Core CPI at 3.1% yoy, ITB's structural advantages—fixed-price agreements, government contracts, and inflation-linked margins—position it to outperform in a high-inflation regime.

In contrast, the food products ETF (XLY) has historically underperformed during inflationary cycles. Its reliance on discretionary spending makes it vulnerable to demand shifts and supply chain disruptions. For instance:
- 2022 Core PCE Surge: XLY declined 3% as margin compression from labor shortages and rising unit costs eroded profitability.
- 2025 Trade War Impact: XLY's 15-month low in 2025 reflects heightened sensitivity to economic uncertainty and tariff-related price pressures.

Actionable Investment Strategy

Given the CCI's signals and historical sector performance, investors should prioritize the following:

1. Overweight Construction and Engineering Sectors
2. Rationale: Infrastructure spending and inflation-linked contracts provide a durable margin buffer. Firms like ACM and FLR benefit from long-term government projects and cost-of-living adjustments.

3. ETF Play: ITB offers broad exposure to construction and engineering firms, with a 3.1% dividend yield and a P/E ratio of 18.5x, reflecting undervaluation relative to its growth potential.

4. Underweight Food Products Sectors

5. Rationale: XLY's exposure to discretionary spending and supply chain vulnerabilities makes it a high-risk asset in a high-inflation, high-interest-rate environment.

6. ETF Adjustment: Reduce exposure to XLY, which has a P/E ratio of 24.3x and a dividend yield of 0.8%, indicating overvaluation and limited margin resilience.

7. Monitor Policy and Labor Market Trends

8. The Federal Reserve's 5.25% policy rate in 2025 has widened sector valuations, favoring construction's long-term project timelines over food products' short-term demand cycles.

Conclusion

The U.S. CB Consumer Confidence Index's July rebound underscores a shift in demand toward infrastructure and housing, driven by easing inflation and policy tailwinds. By overweighting construction and engineering sectors and underweighting food products, investors can align portfolios with macroeconomic trends while mitigating downside risk. Historical backtesting and current policy dynamics reinforce this strategy, offering a roadmap for navigating the evolving economic landscape.