U.S. ISM Non-Manufacturing Prices Miss Expectations at 69.2: Sector Rotation Opportunities Amid Divergent Inflationary Pressures

The U.S. services sector, as measured by the ISM Non-Manufacturing Index, continues to tread a delicate line between resilience and fragility. In August 2025, the Services PMI rose to 52, a six-month high, but the Prices Index—now at 69.2—remains a red flag for investors. This figure, slightly lower than July's 69.9 but still the highest since October 2022, underscores persistent inflationary pressures. However, the divergence in sector performance offers a roadmap for strategic rotation.

The Inflation Divide: Winners and Losers

The ISM report reveals stark contrasts. Transportation & Warehousing, Wholesale Trade, and Finance & Insurance are expanding, driven by AI-driven data center demand and grid modernization projects. Conversely, Accommodation & Food Services, Construction, and Mining are contracting, hampered by tariffs, seasonal lulls, and project delays.

Tariffs, in particular, are a double-edged sword. While Wholesale Trade leverages AI investments to offset costs, Transportation & Warehousing faces deferred projects due to equipment price spikes. Similarly, Agriculture struggles with higher feed costs, while Public Administration remains cautiously optimistic.

Rotation Strategy: Capitalizing on Divergence

1. Overweight High-Growth, Low-Volatility Sectors
2. Wholesale Trade and Finance & Insurance are prime candidates. The former benefits from AI and infrastructure spending, while the latter remains insulated from tariff shocks.

3. Real Estate, Rental & Leasing also shows promise, with stable demand and limited exposure to global trade tensions.

4. Underweight Tariff-Exposed Industries

5. Transportation & Warehousing and Agriculture face near-term headwinds. Investors should avoid overexposure here unless hedging against inflation.

6. Construction and Mining are in contraction, with tariffs and project uncertainty creating a toxic mix.

7. Hedge Against Inflation with Commodity-Linked Plays

8. The Prices Index's stubbornly high reading (69.2) suggests continued cost pressures. Consider allocations to Steel & Aluminum Producers (e.g., Nucor, Kaiser Aluminum) or Software Licensing Firms (e.g., Adobe, Microsoft), which have seen price hikes.

The Bigger Picture: Policy and Seasonality

The Federal Reserve's next move hinges on whether inflation moderates. While the Prices Index dipped slightly in August, it remains above 67—a threshold that could delay rate cuts. Investors should monitor the 10-Year Treasury Yield and CPI data for clues. Meanwhile, the holiday season looms, with businesses scrambling to lock in prices before potential tariff hikes. This creates short-term volatility in Retail Trade and Professional Services, but long-term opportunities for those who can navigate the noise.

Conclusion: Rotate with Precision

The U.S. services sector is not a monolith. While inflationary pressures persist, sector-specific dynamics offer clear entry and exit points. Overweighting AI-driven and infrastructure-linked industries, while hedging against tariff-exposed sectors, can balance growth and risk. As always, timing is key—stay nimble, and let data guide your moves.