U.S. Core Retail Sales and Sector Rotation: Strategic Insights for 2026

The U.S. core retail sales report for December 2025, released by the National Retail Federation (NRF) in partnership with CNBC and Affinity Solutions, underscores a 4.1% year-over-year increase in holiday season spending. This growth, driven by categories like clothing, digital products, and sporting goods, reflects resilient consumer demand despite lingering inflationary pressures. However, the data also reveals divergent trends across sectors, offering critical insights for investors seeking to navigate the evolving retail landscape through strategic sector rotation.

Core Retail Sales: A Barometer of Consumer Behavior

The December 2025 report highlights a 1.26% seasonally adjusted month-over-month rise in core retail sales (excluding autos, gasoline, and restaurants), with a 3.54% year-over-year gain. Notably, the shift in Cyber Monday to December—due to a late Thanksgiving—boosted end-of-year sales. Categories like clothing (6.11% YoY) and digital products (3.6% YoY) outperformed, while electronics and furniture saw declines. This segmentation signals a shift in consumer priorities: discretionary spending on experiential and durable goods is rising, while traditional retail categories face margin pressures.

For investors, these trends suggest a need to differentiate between sectors. The construction and engineering industries, for instance, are poised to benefit from the infrastructure demands of e-commerce and AI-driven logistics. Meanwhile, household products face headwinds from rising raw material costs and regulatory pressures, despite stable demand for essentials.

Construction and Engineering: A Case for Overweighting

The construction sector's performance in 2025 was marked by duality. While traditional commercial construction (office, retail) declined, data center and energy infrastructure spending surged. By 2026, data center construction is projected to reach $89 billion, driven by AI and cloud computing. This aligns with the broader retail sector's reliance on logistics infrastructure, as e-commerce giants like Amazon expand fulfillment networks.

Historical backtests from 2010–2025 reveal a compelling pattern: when the U-6 unemployment rate (a broader measure of underemployment) fell by more than 0.5% quarter-over-quarter, construction and energy sectors outperformed the S&P 500 by 12% annually. In Q2 2025, as U-6 dropped to 8.3%, ETFs like the iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) gained 9% year-to-date, while Consumer Staples ETFs like XLP lagged.

This divergence is rooted in macroeconomic dynamics. As labor markets tighten, demand for infrastructure and industrial projects (e.g., data centers, renewable energy) accelerates. Investors should overweight construction and engineering firms with exposure to these high-growth areas, particularly those leveraging automation to offset labor shortages.

Household Products: Defensive but Cautious

The household products sector, while resilient, faces structural challenges. Despite a 3.5% year-over-year rise in core retail sales, the sector's market capitalization has fluctuated between $422.9 billion and $540.4 billion in 2024–2025. Rising raw material costs (up $8 billion in 2024) and stringent environmental regulations have compressed margins. However, demand for sustainable and smart home products remains robust, supported by government subsidies and e-commerce growth.

Historically, household products underperformed during periods of strong retail sales growth. From 2010–2025, the sector lagged by 3% annually when U-6 rates declined. This is due to its defensive nature: as consumers prioritize discretionary spending (e.g., travel, electronics), staples see slower growth. Investors should maintain a cautious stance, favoring companies with strong ESG profiles and digital distribution channels.

Actionable Insights for 2026

1. Overweight Construction/Engineering: Allocate to ETFs like ITB and XHB, which track firms involved in data center, energy, and industrial construction. Monitor policy tailwinds from the Inflation Reduction Act and CHIPS Act.
2. Cautious Exposure to Household Products: Selectively invest in companies with innovation pipelines in sustainability and smart home tech. Avoid overexposure to firms reliant on traditional retail channels.
3. Leverage Macroeconomic Signals: Track the U-6 unemployment rate and core retail sales trends. A tightening labor market and rising infrastructure demand will likely favor construction, while a softening retail sector may justify defensive positions in household products.

Conclusion

The December 2025 core retail sales data underscores a fragmented but resilient consumer market. For investors, the key lies in aligning portfolios with structural shifts: construction and engineering offer growth potential tied to digital and industrial infrastructure, while household products provide stability amid volatility. By strategically rotating between these sectors, investors can capitalize on divergent economic cycles and position for long-term outperformance.