U.S. Consumer Confidence and Sector Rotation: Navigating Cyclical Gains and Defensive Risks

The latest U.S. consumer confidence data from The Conference Board, released in July 2025, paints a nuanced picture of economic sentiment. The Consumer Confidence Index (CCI) rose to 97.2, driven by a 4.5-point increase in the Expectations Index to 74.4. While this marks a stabilization after a sharp decline in April, the index remains below the 80 threshold—a historical marker for recessionary risks. For investors, this mixed signal offers a strategic lens to evaluate sector rotation opportunities, particularly in cyclical industries like Construction and Engineering, while cautioning against overexposure in defensive sectors such as Food Products.

Cyclical Sectors: Gaining Momentum in a Stabilizing Climate

The modest rebound in consumer confidence, particularly the 4.5-point surge in the Expectations Index, suggests a cautious optimism about future economic conditions. This is critical for cyclical sectors tied to discretionary spending and long-term investment. For example, Construction and Engineering firms often benefit when households and businesses anticipate improved financial prospects. A stronger labor market (with 17.5% of consumers expecting more jobs) and stable home-buying plans (despite short-term declines) indicate pent-up demand for housing, infrastructure, and commercial real estate projects.

Historical backtests reinforce this pattern. During the 2021–2022 confidence rebound, the S&P 500 Construction & Engineering Index outperformed the broader market by 12% as households prioritized home improvements and infrastructure spending. A similar dynamic could play out in 2025, especially if the “Big Beautiful Bill” budget reconciliation legislation spurs public works projects.

Defensive Sectors: A Cautionary Tale

Conversely, defensive sectors like Food Products may face headwinds. While 12-month inflation expectations eased to 5.8%, consumers remain wary of price pressures. The data shows a decline in service-sector spending intentions, particularly for dining out and transportation, which could indirectly impact food manufacturers. For instance, if consumers shift from dining out to cooking at home, demand for packaged food products may stagnate.

A backtest of the S&P 500 Food Products Index during the 2020–2021 confidence slump reveals a 7% underperformance relative to the S&P 500. In a scenario where confidence remains volatile, investors might overweight sectors with resilient cash flows (e.g., utilities or healthcare) rather than food products.

Strategic Implications for Investors

1. Overweight Cyclical Sectors: Investors should consider increasing exposure to Construction and Engineering firms, particularly those with strong ties to residential and infrastructure projects. ETFs like the iShares U.S. Construction ETF (ITG) or individual stocks such as Bechtel Group (BCH) could benefit from a stabilization in confidence.
2. Underweight Defensive Sectors: Food Products stocks, while traditionally safe, may face margin pressures in a high-inflation environment. Investors might reduce allocations to firms like General Mills (GIS) or Kellogg (K) in favor of sectors with more predictable demand (e.g., healthcare or utilities).
3. Monitor Inflation and Tariffs: While 12-month inflation expectations have eased, the risk of rising prices linked to tariffs remains. A diversified portfolio with exposure to both cyclical and defensive sectors can mitigate risks if confidence falters again.

Conclusion

The July 2025 consumer confidence data underscores a fragile but improving economic environment. For equity investors, this creates a window to rotate into cyclical sectors poised to capitalize on pent-up demand and policy-driven growth. However, the lingering risks of inflation and labor market uncertainty necessitate a balanced approach. By leveraging historical backtests and sector-specific fundamentals, investors can navigate this landscape with a strategic mix of optimism and caution.