U.S. Core CPI Misses Expectations, Signaling Easing Inflationary Pressures: A Sector Rotation Playbook for 2026

The U.S. core Consumer Price Index (CPI) for November 2025 came in at 2.6% year-over-year, significantly below the 3.1% consensus forecast. This marked a sharp deceleration from the 3.0% reading in September and underscored a broader disinflationary trend. While the data was clouded by the 43-day government shutdown, which forced the Bureau of Labor Statistics to rely on imputed values and limited November data collection, the 2.6% figure aligns with a softening inflationary backdrop. This development has profound implications for sector rotation strategies, particularly for investors navigating a shifting monetary policy environment.

The Fed's Pivot and Sector Implications

The Federal Reserve's December 2025 FOMC meeting occurred without the benefit of official November CPI data, but the eventual release of the 2.6% reading reinforced expectations of a policy pivot. With inflation trending toward the Fed's 2% target, markets are pricing in a potential rate cut in Q2 2026. This shift creates a fertile ground for sector rotation, as different industries respond asymmetrically to easing inflation and accommodative monetary policy.

Banks: Beneficiaries of a Stable Rate Environment
Historical data reveals a consistent pattern: banking sectors outperform during periods of disinflation or inflation moderation. The S&P Bank Select Sector Index has, on average, outperformed the S&P 500 by 4.2% in the three months following core CPI undershoots. This resilience stems from two key factors:
1. Net Interest Margin (NIM) Expansion: Stable or falling inflation reduces the likelihood of abrupt rate hikes, allowing banks to maintain predictable lending margins. With the Fed signaling potential rate cuts in 2026, banks stand to benefit from wider NIMs and improved loan demand.
2. Credit Demand Resilience: Low inflation often correlates with strong demand for fixed-rate loans, particularly in small business and consumer lending. Regional banks, such as those in the XLB (SPDR S&P Bank Select Sector ETF), are well-positioned to capitalize on this dynamic.

Healthcare Services: Structural Headwinds in a Disinflationary Climate
Conversely, the healthcare sector has historically underperformed during inflation moderation. The S&P Health Care Select Sector Index has lagged the S&P 500 by an average of 2.1% following core CPI undershoots. This underperformance is driven by:
1. Rigid Cost Structures: Healthcare providers face inelastic costs, such as labor and drug development, which do not compress as easily as margins in other sectors.
2. Regulatory Constraints: Reimbursement rates for hospitals and pharmaceutical firms are often tied to government schedules, limiting their ability to adjust to disinflationary conditions.

Strategic Rebalancing: Overweight Banks, Underweight Healthcare

The December 2025 CPI miss reinforces a strategic rebalancing toward banking and away from healthcare. Here's how investors can position their portfolios:
- Banks: Overweight banking ETFs like XLB, which have historically outperformed in low-inflation environments. Regional banks with strong small business loan pipelines (e.g., KeyCorp, PNC Financial Services) offer additional upside.
- Healthcare: Reduce exposure to healthcare services, particularly hospital operators and pharmaceutical firms with cost-plus pricing models. Defensive allocations to healthcare ETFs like XLV should be limited to 5–10% of a portfolio.

Risks and Considerations

While the disinflationary trend supports this rotation, investors must remain vigilant. Banks could face margin pressures if credit risk rises in a prolonged low-rate environment. Meanwhile, healthcare may see short-term gains from cost-cutting or innovation, but these benefits are unlikely to offset structural headwinds.

Conclusion

The November 2025 core CPI miss signals a pivotal shift in inflationary pressures, creating a clear playbook for sector rotation. Banks, with their exposure to stable interest rates and robust credit demand, are poised to outperform. Healthcare, constrained by rigid costs and regulatory dynamics, remains a defensive play at best. As the Fed inches toward a rate-cutting cycle, investors should prioritize banking sector allocations while adopting a cautious stance toward healthcare services.