July 2025 Durables Ex Defense Data: A Tipping Point for Sector Rotation and Defensive Positioning

The U.S. industrial economy is at an inflection point. The July 2025 release of Durable Goods Orders Excluding Defense data—a -9.4% month-over-month collapse—marks the steepest drop since April 2020, during the height of pandemic-driven shutdowns. This sharp decline in capital goods demand, driven by a 22.4% plunge in transportation equipment orders, signals a critical shift in economic momentum. For investors, the data underscores a dual imperative: reassessing cyclical exposure and fortifying defensive positions as macroeconomic tightening accelerates.

The Cracks in Capital Goods Demand

The -9.4% MoM drop in July 2025 (excluding defense) is more than a statistical anomaly. It reflects a broader malaise in business investment. Capital goods—machinery, equipment, and tools that drive productivity—are typically the first casualties in a tightening cycle. With the Federal Reserve's 500-basis-point rate hike since 2023 still reverberating through borrowing costs, corporate spending on long-term assets has stalled. The 22.4% drop in transportation equipment orders ($32.6 billion in lost demand) highlights this trend, as manufacturers scale back on costly machinery and logistics infrastructure.

This collapse contrasts sharply with the May 2025 surge of 15.5%, illustrating the sector's volatility. However, the July figure is not a one-off. Historical context reveals a pattern: the average growth rate for this indicator is 0.37% since 1992, with extremes of 29.30% (July 2014) and -22.20% (August 2014). The July 2025 data, at -9.4%, sits firmly in the bearish tail of this distribution.

Sector Rotation: Electrical Equipment vs. Insurance

The market's response to this data has been telling. Two sectors—Electrical Equipment and Insurance—offer a masterclass in contrasting investment logic.

1. Electrical Equipment (XEL):
   The sector, a proxy for industrial activity, has seen its year-to-date total return contract by 12% following the July data. This aligns with the capital goods selloff, as demand for energy infrastructure and manufacturing tech wanes. reveals a divergence, with XEL underperforming by 800 basis points. For investors, this underscores the risk of overexposure to cyclical plays in a slowing economy.

2. Insurance (KHC):
   Conversely, the insurance sector has gained 4.5% in July 2025, outperforming the S&P 500 by 200 basis points. This reflects a flight to defensive assets. highlights the resilience of dividend-yielding, low-beta stocks. Insurance firms, with their stable cash flows and economic moat, are increasingly seen as hedges against inflation and recession.

Strategic Implications for Risk-Averse Portfolios

The July 2025 data demands a recalibration of portfolio allocations. Here's how to position for the tightening cycle:

1. Reduce Capital Goods Exposure:
   Cut back on high-beta industrial equities (e.g., machinery, aerospace) and long-duration bonds. The -9.4% MoM decline suggests that business investment will remain muted in Q3 2025.

2. Increase Defensive Sector Weights:
   Overweight utilities, healthcare, and insurance. These sectors are less sensitive to economic cycles and offer dividend stability. The insurance sector's July performance validates this strategy.

3. Hedge with Short-Duration Fixed Income:
   As the Fed's rate-hike cycle nears its peak, short-term bonds (e.g., 1–3 year maturities) offer better risk-adjusted returns. The 10-year Treasury yield, which spiked to 4.5% post-July data, is a key monitor for further rate normalization.

4. Consider Sector Rotation ETFs:
   Instruments like the XLV (Health Care Select Sector SPDR) and XLF (Financial Select Sector SPDR) can facilitate tactical shifts. Avoid leveraged ETFs in a volatile environment.

The Long Game: Capital Goods and Rate Cuts

While the near-term outlook is bleak, the long-term trajectory for capital goods remains positive. Econometric models project a 1.30% growth rate in 2026 and 0.80% in 2027, assuming the Fed begins rate cuts in mid-2026. Investors with a 3–5 year horizon may consider buying dips in industrial stocks, particularly in sectors with strong balance sheets and pricing power (e.g., semiconductors, automation).

However, for those prioritizing capital preservation in 2025–2026, the message is clear: defensive positioning is not a constraint—it's a strategic advantage.

Conclusion

The July 2025 Durables Ex Defense data is a wake-up call. As capital goods demand falters and rate hikes bite deeper, the market is sending a clear signal: rotate to defensives. For risk-averse investors, the Insurance and Utilities sectors offer both safety and income. For those with a longer horizon, the key is patience—waiting for the cycle to turn before re-engaging cyclical plays. In a tightening macroeconomic environment, agility and discipline will separate the resilient from the reactive.