U.S. Current Account Deficit Narrows Sharply: A Case for Sector Rotation Toward Insurance and Away from Leisure Products

The U.S. current account deficit has long been a barometer of economic health, trade dynamics, and investor sentiment. In the third quarter of 2025, the deficit contracted by $22.8 billion (9.2%) to $226.4 billion, far exceeding expectations of $238.4 billion. This surprise was driven by a combination of aggressive tariff policies, a surge in services exports, and a shift in primary income flows. For investors, this data point is more than a macroeconomic curiosity—it's a signal to reassess sector allocations. Specifically, the Insurance sector appears poised to benefit from the narrowing deficit, while Leisure Products may face headwinds.

The Insurance Sector: A Hidden Winner in a Narrowing Deficit

The Insurance industry has historically been sensitive to interest rates and economic cycles, but the recent current account data suggests a new tailwind. The narrowing deficit, particularly the shift from a primary income deficit to a surplus in Q3 2025, reflects stronger inflows of direct investment income. This is critical for insurers, which rely on stable cash flows and long-term asset management.

The sector's valuation metrics tell a compelling story. Over the past three years, the U.S. Insurance industry has seen earnings grow at a 22% annual rate, outpacing revenue growth of 6.1%. Despite this, the sector trades at a PE ratio of 13.6x, well below its 3-year average of 18.7x. This discount suggests undervaluation relative to fundamentals. The PS ratio of 1.4x is also near its historical average, indicating a balanced valuation.

The narrowing current account deficit could further bolster insurers. A stronger dollar, driven by reduced trade imbalances, often leads to higher yields on foreign investments—a boon for insurers with global portfolios. Additionally, the sector's resilience during the 2023 banking crisis (despite bond portfolio losses) underscores its structural strength. For investors, this is a rare opportunity to overweight a sector that's both undervalued and aligned with macroeconomic tailwinds.

Leisure Products: A Sector at Risk in a High-Import Environment

Conversely, the Leisure Products sector has struggled to adapt to the shifting trade landscape. From January 2023 to January 2026, the sector's market capitalization plummeted from $51.0 billion to $27.3 billion before a partial recovery to $46.0 billion. Earnings have been volatile, with the industry posting a $1.9 billion loss in January 2026.

The current account deficit's expansion in Q1 2025 (to $450.2 billion) was fueled by a surge in imports of consumer goods, including pharmaceuticals and nonmonetary gold. While the deficit has since narrowed, the sector's exposure to discretionary spending makes it vulnerable to trade policy shifts. Tariffs may reduce import volumes, but they also raise costs for domestic producers reliant on imported materials.

The sector's PS ratio has risen to 1.3x, up from a 3-year average of 0.98x, indicating investors are paying more for each dollar of revenue. This premium is unjustified given the sector's earnings trajectory. A narrowing current account deficit may not be a silver bullet for Leisure Products; instead, it could signal a shift in consumer priorities toward essentials over discretionary spending.

Strategic Implications for Investors

The data paints a clear picture: the Insurance sector is undervalued and structurally positioned to benefit from a narrowing current account deficit, while Leisure Products remains overvalued relative to its fundamentals.

1. Overweight Insurance: Investors should consider increasing exposure to insurers with strong balance sheets and global investment portfolios. The sector's low PE ratio and high earnings growth make it an attractive value play.
2. Underweight Leisure Products: Given the sector's earnings volatility and sensitivity to trade policy, reducing allocations to Leisure Products is prudent. A narrowing deficit may not reverse the sector's long-term challenges.

The U.S. current account deficit is not just a macroeconomic indicator—it's a lens through which to view sector dynamics. As the economy adjusts to tariffs and shifting trade flows, the Insurance sector offers a compelling case for rotation, while Leisure Products serves as a cautionary tale. For investors, the key is to align portfolios with the forces reshaping the global economy.