U.S. Durables Ex Defense (MoM) Contracts 1.5%—Revealing Sectoral Divergence in Market Response

The U.S. manufacturing sector is navigating a complex landscape of contraction and cautious optimism. While the latest data on Durable Goods Orders Excluding Defense (MoM) reveals a 1.5% contraction, this figure masks a broader story of sectoral divergence. Investors seeking to capitalize on this environment must adopt a nuanced approach, leveraging sector rotation strategies to hedge against volatility and position for long-term growth.

Understanding the Contraction: A Mixed Picture

The 1.5% decline in durable goods orders (excluding defense) for the quarter reflects ongoing challenges in the manufacturing sector. The Institute for Supply Management (ISM) Manufacturing PMI has remained below 50 for nine consecutive months, signaling contraction. New orders and employment indices have been particularly weak, with the latter hitting a sharp 44 in November 2025—the lowest since early autumn. Tariffs, rising input costs, and labor shortages have compounded these pressures, with steel prices up 4.2% YoY and copper hitting historic highs due to demand for electrification and AI infrastructure.

However, the data also reveals pockets of resilience. Production activity briefly entered expansion territory in October 2025, and the “New Orders less Inventories” index showed two consecutive months of positive readings—a historically significant leading indicator of recovery. Meanwhile, freight markets have diverged: container rates from Asia have softened, while bulk freight for raw materials like iron ore has surged. This duality underscores the need for investors to differentiate between sectors.

Sectoral Divergence: Winners and Losers in a Slowing Environment

The contraction in durable goods orders has not uniformly impacted all sectors. Traditional manufacturing—particularly industries reliant on imported materials—has borne the brunt of tariffs and supply chain disruptions. For example, steel and aluminum producers face margin compression as input costs rise, while labor-intensive sectors struggle with workforce shortages.

Conversely, sectors aligned with technological innovation and reshoring efforts are gaining traction. The AI Action Plan and investments in data centers have spurred demand for semiconductors, transformers, and power generation systems. Similarly, the One Big Beautiful Bill Act's tax incentives are fueling growth in clean energy and electric vehicle (EV) manufacturing. These sectors are outperforming peers, with the S&P 600 Industrials and Transportation sectors maintaining EBITDA margins of 12.1% and 11.7%, respectively, despite cost pressures.

Investment Strategy: Rotating into Resilient Sectors

In a slowing manufacturing environment, sector rotation becomes a critical tool for managing risk and capturing growth. Here's how investors can position their portfolios:

1. Overweight AI and Automation Sectors:
   Companies providing AI-driven tools, robotics, and smart manufacturing solutions are well-positioned to benefit from productivity gains. For instance, firms like NVIDIA and Siemens are seeing robust demand as manufacturers adopt automation to offset labor shortages.

2. Underweight Traditional Manufacturing and Commodity-Heavy Sectors:
   Sectors exposed to tariffs and volatile commodity prices—such as steel, aluminum, and industrial machinery—remain vulnerable. Investors should reduce exposure to these areas until trade policy clarity emerges.

3. Balance with Defensive Sectors:
   While the manufacturing contraction persists, defensive sectors like utilities and healthcare may offer stability. These sectors are less sensitive to economic cycles and can provide downside protection.

4. Monitor Key Indicators for Rotation Cues:
   Closely track the ISM PMI, durable goods orders, and freight rate trends. A sustained rebound in the “New Orders less Inventories” index could signal a broader recovery, prompting a shift back into cyclical sectors.

The Road Ahead: Caution and Opportunity

The U.S. manufacturing sector is at a crossroads. While the 1.5% contraction in durable goods orders highlights near-term fragility, long-term projections suggest a gradual recovery, with durable goods orders expected to trend around 1.30% in 2026 and 0.80% in 2027. Investors must remain agile, leveraging sector rotation to navigate the uneven recovery.

In conclusion, the current environment demands a strategic, data-driven approach. By identifying sectors poised to thrive in a reshaped manufacturing landscape—while hedging against those facing headwinds—investors can turn uncertainty into opportunity. The key lies in balancing caution with conviction, ensuring portfolios are both resilient and responsive to evolving market dynamics.