U.S. ISM Non-Manufacturing Business Activity Surprises with Reading of 54.5: Navigating Sector Rotation in a Divergent Macro Landscape

The U.S. ISM Non-Manufacturing Business Activity Index surged to 54.5 in November 2025, defying expectations and signaling robust expansion in the services sector. This reading, a 0.2-point increase from October's 54.3, underscores a critical inflection point in the U.S. economy: while manufacturing struggles with contraction and global trade headwinds, the services sector is emerging as the dominant engine of growth. For investors, this divergence presents a compelling case for strategic sector rotation and macroeconomic positioning.

The Services Sector: A Beacon of Resilience

The services sector, which accounts for 73% of U.S. GDP, has demonstrated remarkable resilience despite macroeconomic turbulence. The November ISM Non-Manufacturing report highlighted expansion in key industries such as Retail Trade, Arts, Entertainment & Recreation, and Health Care & Social Assistance. These industries are capitalizing on pent-up demand, digital transformation, and demographic tailwinds (e.g., aging populations driving healthcare spending).

However, the data also reveals cracks in the foundation. The Employment Index for services remains below 50 for the sixth consecutive month, signaling ongoing hiring caution. This reflects lingering uncertainty from the government shutdown and supply chain disruptions tied to tariffs. Yet, the New Orders Index at 52.9 and Business Activity Index at 54.5 suggest that demand is outpacing labor constraints, creating a fertile ground for productivity-driven growth.

Manufacturing's Struggle and the Case for Divergence

In stark contrast, the U.S. manufacturing sector continues to contract, with the ISM Manufacturing PMI at 48.2 in November 2025. This marks the ninth consecutive month of contraction, driven by weak exports, tariff-related cost pressures, and inventory overhangs. The New Orders Index at 47.4 and Employment Index at 44 highlight a sector grappling with structural challenges.

The divergence between services and manufacturing is not merely a U.S. phenomenon. Globally, services PMIs in developed economies like France and the UK have rebounded, while manufacturing PMIs remain sub-50. This macroeconomic split is reshaping investment paradigms: services-driven growth is now the new normal, while manufacturing faces a prolonged period of adjustment.

Sector Rotation: Where to Position Capital

For investors, the key lies in rotating capital toward services subsectors with structural growth drivers while hedging against manufacturing's fragility. Here's how to approach this:

1. Health Care & Social Assistance: With the Health Care Index at 54.5, this sector is poised to benefit from demographic trends and policy tailwinds. ETFs like XLV (Health Care Select Sector SPDR) or individual stocks in telemedicine and AI-driven diagnostics could offer exposure.
2. Arts, Entertainment & Recreation: The Arts & Entertainment Index at 53.8 reflects a post-pandemic rebound in discretionary spending. Companies in streaming, live events, and experiential tech (e.g., AMZN, AAPL) are well-positioned.
3. Retail Trade: The Retail Trade Index at 52.6 indicates sustained consumer demand. E-commerce platforms and omnichannel retailers (e.g., WMT, TGT) are prime candidates.
4. Hedging Manufacturing Exposure: For investors with existing manufacturing exposure, consider short-term hedges via inverse ETFs like XAR (Short Small Cap 600) or sector-specific options.

Macro Divergence and Strategic Implications

The services sector's expansion is not just a cyclical rebound—it reflects a structural shift in the global economy. Services industries are increasingly digitized, less capital-intensive, and more adaptable to policy changes (e.g., AI adoption, remote work). Meanwhile, manufacturing remains vulnerable to trade wars, energy costs, and overcapacity.

Investors should also monitor steel prices and tariffs as leading indicators. The 50% tariffs on imported steel have created a price floor for domestic producers, but weak demand from traditional manufacturing sectors could limit upside.

Conclusion: Positioning for the New Normal

The U.S. ISM Non-Manufacturing Index's 54.5 reading is a wake-up call for investors: services are the new growth engine, and manufacturing's struggles are likely to persist. By rotating into services subsectors with durable demand and hedging against manufacturing's fragility, investors can capitalize on the macroeconomic divergence.

As the Federal Reserve navigates this landscape, the focus will shift from rate hikes to sector-specific interventions. For now, the data is clear: the future belongs to services.