U.S. Economic Momentum and Sectoral Resilience: A PMI-Driven Analysis of Equities and Treasury Allocations

The U.S. economy entered Q3 2025 with a mixed but resilient profile, as reflected in the latest Purchasing Managers' Index (PMI) data. While the manufacturing sector continued its contractionary trend, the services sector maintained growth, albeit at a moderated pace. These divergent signals have had cascading effects on equity sector performance and Treasury allocations, offering critical insights for investors navigating a landscape shaped by policy uncertainty, inflationary pressures, and sector-specific dynamics.

Manufacturing Contraction Slows, Services Growth Stalls

The U.S. manufacturing PMI for September 2025 fell to 49.1, marking the seventh consecutive month of contraction but a slight deceleration from August's 48.7 reading Manufacturing PMI® at 49.1%; September 2025 ISM®^[1]. This suggests that while the sector remains under pressure-driven by tariffs, supply chain disruptions, and weak new orders-production and employment declines have stabilized. For instance, the New Orders Index dropped to 48.9 in September, reflecting ongoing demand challenges, particularly in transportation equipment and chemical products Manufacturing PMI® at 49.1%; September 2025 ISM®^[1].

In contrast, the Services PMI for September 2025 declined to 53.9 from 54.5 in August, indicating a slowdown in private-sector activity United States Services PMI - TRADING ECONOMICS^[2]. While the index remained above the 50 threshold, the moderation was attributed to softer domestic demand and rising input costs, including tariffs and payroll expenses. Notably, export sales rose for the first time since March 2025, hinting at potential resilience in global markets United States Services PMI - TRADING ECONOMICS^[2].

Equity Sector Performance: Tech and Industrials Lead Amid Dovish Policy

The PMI-driven economic backdrop has influenced equity sector performance, with cyclical sectors outperforming defensive ones. The S&P 500 and Nasdaq-100 reached all-time highs in Q3 2025, fueled by strong corporate earnings and the resumption of a rate-cut cycle by the Federal Reserve September, Third Quarter 2025 Review and Outlook^[3]. Technology and Industrials emerged as key beneficiaries.

• Technology Sector: The sector saw a 0.49% increase in September 2025, driven by AI-related investments and optimism around the Fed's dovish stance Sector & Industry Performance - Bloomberg^[4]. The Magnificent Seven companies, which dominate the Nasdaq, continued to attract capital, reflecting investor confidence in long-term growth narratives despite macroeconomic headwinds.
• Industrials Sector: The Industrials sector posted a 0.31% gain, supported by modest improvements in manufacturing production and infrastructure-related demand Sector & Industry Performance - Bloomberg^[4]. However, sector-specific challenges, such as tariff-driven cost inflation, limited broader gains.

Charles Schwab's September 2025 outlook maintained a "Marketperform" rating for all 11 S&P 500 sectors, underscoring the cautious sentiment around trade policy uncertainty Monthly Stock Sector Outlook (2025) - Charles Schwab^[5].

Treasury Yields and the Fed's Dovish Pivot

The Federal Reserve's 25-basis-point rate cut in September 2025, coupled with expectations of further easing, significantly influenced Treasury yields. The 10-year U.S. Treasury yield declined from 4.17% on September 4 to 4.05% by September 15, reflecting market pricing of accommodative monetary policy 10 Year Treasury Rate - Real-Time & Historical Yield Trends^[6]. By October 1, the yield had rebounded to 4.16%, as investors balanced dovish Fed signals with concerns over inflation and stagflationary risks US Treasury Rates: Bond & Bill Yields with Duration Analysis^[7].

The 2-year Treasury yield, meanwhile, approached a 3-year support level at 3.55% in September, illustrating the market's focus on short-term policy expectations September, Third Quarter 2025 Review and Outlook^[3]. The inverted yield curve-a persistent feature since mid-2024-remained a cautionary signal for long-term growth, as tighter monetary policy and fiscal uncertainty continued to weigh on expectations.

Implications for Investors

The interplay between PMI trends, equity sector performance, and Treasury yields highlights a bifurcated economic landscape. Investors should consider the following strategies:
1. Sector Rotation: Overweight Technology and Industrials, which have demonstrated resilience despite manufacturing headwinds. Defensive sectors like Utilities and Healthcare may offer stability in a volatile environment.
2. Treasury Allocation: A tactical shift toward intermediate-duration Treasuries could capitalize on the Fed's dovish pivot while mitigating inflation risks. The 10-year yield's volatility suggests caution in long-duration bets.
3. Macro Hedges: Given the persistence of tariffs and supply chain disruptions, investors may hedge against sector-specific risks through diversified exposure to AI-driven innovation and global export-oriented firms.

Conclusion

The Q3 2025 PMI data underscores a U.S. economy navigating a delicate balance between contraction in manufacturing and cautious optimism in services. While equity markets have rallied on the back of AI-driven growth and rate cuts, Treasury yields remain sensitive to shifting inflation and policy expectations. For investors, the key lies in aligning allocations with sectoral resilience and macroeconomic signals, ensuring a balanced approach to both growth and risk mitigation.