U.S. ISM Non-Manufacturing PMI Surpasses 56.0: A Strategic Shift from Consumer Staples to Energy Equipment and Services

The U.S. ISM Non-Manufacturing Business Activity index has crossed the 56.0 threshold, marking a pivotal inflection point for investors. This surge—driven by robust demand in services like retail, healthcare, and transportation—signals a structural shift in economic momentum. While consumer staples have long been a safe haven, the current policy and market dynamics demand a recalibration of risk exposure. Tactical asset allocation must now prioritize energy equipment and services, a sector poised to benefit from both regulatory tailwinds and supply-side bottlenecks.

Services Sector Strength: A Double-Edged Sword

The ISM Non-Manufacturing PMI's rise to 56.0 underscores a services-driven economy. Consumer spending, particularly during the holiday season, has fueled growth in sectors like retail and hospitality. However, this strength has also exposed vulnerabilities in consumer staples. With demand for essentials like groceries and household goods stabilizing, the sector's growth potential is capped. Historical backtests show that during prolonged services-sector expansions, consumer staples ETFs (e.g., XLP) underperform energy equipment ETFs (e.g., IEN) by 3–5% annually, as capital flows to sectors with higher margin resilience.

Policy-Driven Divergence in Energy Equipment

The energy equipment and services sector, meanwhile, is navigating a complex policy landscape. Tariffs on critical components—such as transformers and gas turbines—have inflated costs by 13.7–23.5%, but these pressures are creating opportunities for domestic manufacturers. The Trump administration's aggressive permitting policies for oil and gas projects, coupled with AI-driven infrastructure investments, are driving demand for energy equipment. For instance, gas turbine prices have doubled since 2022, yet demand remains robust as utilities seek reliable baseload power for data centers and industrial hubs.

Tactical Allocation: Reducing Consumer Staples Exposure

Investors should consider reducing exposure to consumer staples, where margins are under pressure from price competition and regulatory scrutiny. For example, the S&P 500 Consumer Staples sector's earnings growth has lagged the broader market by 2.1% year-to-date, despite the services-sector boom. This divergence is exacerbated by the sector's low sensitivity to interest rate cycles—a liability in a tightening monetary environment.

Increasing Energy Equipment/Services Allocation

Conversely, energy equipment and services offer compelling upside. The sector's resilience stems from its alignment with policy priorities and its role in addressing supply chain constraints. For instance, the backlog of transformer orders—still measured in years—creates a near-term tailwind for companies like Caterpillar (CAT) and Halliburton (HAL). Additionally, the One Big Beautiful Bill Act (OBBBA) has spurred a surge in utility-scale solar installations, with 9.8 GWdc added in Q3 2025 alone. While residential solar faces headwinds, the commercial and utility segments are set to outperform.

Actionable Insights for Investors

1. Rebalance Portfolios: Shift 10–15% of consumer staples allocations to energy equipment ETFs or individual stocks with strong tariff resilience.
2. Hedge Tariff Risks: Favor companies with diversified supply chains or those benefiting from reshoring incentives (e.g., those qualifying for Section 45X tax credits).
3. Monitor Policy Catalysts: Track the outcome of Section 232 investigations and permitting decisions, which could unlock $44 GWdc of stalled solar projects.

The ISM Non-Manufacturing PMI's surge above 56.0 is not merely a macroeconomic signal—it is a call to action. By pivoting toward energy equipment and services, investors can capitalize on a sector uniquely positioned to thrive in a policy-driven, supply-constrained world. The time to act is now, before the next wave of tariffs or regulatory shifts reshapes the landscape once more.