The Differential Impact of 2025 Tariffs on Goods vs. Services and What It Means for 2026 Sector Rotation

The 2025 tariff policies have created a stark divergence in inflationary pressures between goods and services sectors, reshaping the investment landscape for 2026. While goods-heavy industries face acute headwinds, service sectors such as Communication Services, Healthcare, and Utilities are emerging as resilient, undervalued opportunities. This analysis explores the macroeconomic implications of these tariffs and outlines a strategic approach to sector rotation in the coming year.

Tariff-Driven Inflation: Goods Sectors Under Fire

Tariffs on goods have amplified inflationary pressures, with import prices surging nearly 10% in 2025 and passing these costs to consumers in 2026. The average effective tariff rate in the U.S. climbed to 17.9%, the highest since 1934, disproportionately affecting sectors like apparel (34% price increase) and leather products (36% price increase). These sectors, already grappling with supply chain bottlenecks, now face reduced real GDP growth-0.5 percentage points in 2025 and 0.4 in 2026. Construction and agriculture, meanwhile, have contracted by 3.7% and 0.3%, respectively, underscoring the fragility of goods-dependent industries.

The apparel sector, for instance, trades at a price-to-book (P/B) ratio of 3.89, while construction (Engineering/Construction) has a P/B of 5.49. These metrics, combined with tariff-driven affordability crises, signal overexposure to inflationary risks. Investors are advised to avoid concentrated bets in these sectors, as their valuations remain vulnerable to further policy shifts and consumer demand erosion.

Service Sectors: Resilience Amidst Volatility

In contrast, service sectors have demonstrated relative insulation from tariff-driven inflation, with Communication Services and Healthcare emerging as standout opportunities. The Communication Services sector, despite a 13.44% share price increase since Q2 2025, trades at a forward P/E ratio that reflects its AI-driven efficiency in advertising (e.g., Meta and Alphabet). While its trailing twelve-month net income contracted by 1.4%, its valuation remains attractive compared to overvalued hardware peers.

Healthcare, with a P/E ratio of 23, offers defensive characteristics through pharmaceutical innovation and demographic tailwinds. As core services inflation remains sticky-driven by housing and wages- Healthcare's stable cash flows position it as a counterbalance to goods-sector volatility. Similarly, Utilities, trading at an average P/E of 18x, benefit from surging energy demand for AI data centers and infrastructure modernization. Companies like Exelon and Pacific Gas & Electric are trading at valuations below sector averages, offering compelling entry points.

Strategic Sector Rotation for 2026

The Federal Reserve's anticipated rate cuts in early 2026 will further tilt the playing field. Financials, with a forward P/E of 16.5, are poised to capitalize on lower borrowing costs, while Industrials-despite a sector P/E of 24x-show promise through undervalued names like Boeing and Honeywell. These sectors align with a broader market rotation away from AI-driven technology narratives, which now face sustainability concerns.

Investors should prioritize diversification, avoiding overconcentrated exposure to goods sectors while leveraging the defensive and growth potential of services. The K-shaped recovery-where sectors and consumers diverge in performance- demands agility. For example, the Communication Services Select Sector SPDR Fund (XLC) and Health Care Select Sector SPDR Fund (XLV) offer balanced exposure to resilient, undervalued segments.

Conclusion

The 2025 tariff policies have cemented a structural shift in the U.S. economy, with goods sectors bearing the brunt of inflationary pressures. As 2026 unfolds, investors must navigate this fragmented landscape by rotating into service sectors insulated from tariff impacts. By targeting undervalued opportunities in Communication Services, Healthcare, and Utilities, while sidestepping overexposed goods categories, portfolios can balance growth and risk mitigation in an era of macroeconomic instability.