U.S. Non-Manufacturing PMI Surprises and Sector Rotation Opportunities

The U.S. Non-Manufacturing PMI (ISM Services PMI) for November 2025, , underscores a nuanced story of sectoral divergence. While the services sector remains in expansion, the data reveals stark contrasts: construction and engineering face headwinds, while healthcare equipment and services show resilience. For investors, this divergence presents a critical opportunity to reallocate capital toward sectors with structural tailwinds and hedge against those with deteriorating fundamentals.

Construction and Engineering: A Tale of Two Sectors

The construction industry, as reflected in the ISM report, is in contraction, with its Business Activity Index below 50 for November. High mortgage rates, supply chain bottlenecks, and labor shortages have stifled residential and commercial activity. Subcontractors are “tightening their belts” to maintain build volumes, and employment in the sector has contracted for eight consecutive months. Yet, within this broader malaise, a key outlier emerges: data center construction.

Driven by AI adoption and hyperscale computing demand, data center construction has become a bright spot. Deloitte projects U.S. data center power demand could grow fivefold by 2035, with AI infrastructure accounting for most of this surge. The (OBBBA) has further incentivized this shift, offering tax breaks for R&D and advanced manufacturing. This creates a paradox: while the broader construction sector struggles, niche sub-sectors like data center engineering are thriving.

Investment Implications:
- Overweight construction-linked equities with exposure to data center infrastructure. Firms like Bechtel (BHI) and Turner Construction (TNC) are positioning for AI-driven demand.
- Hedge against traditional construction via inverse ETFs or modular housing providers (e.g., , ICON) to capitalize on efficiency-driven solutions.
- Monitor policy tailwinds: The OBBBA's R&D tax incentives and permitting streamlining for data centers could unlock near-term gains.

Healthcare Equipment: Resilience Amid Cost Pressures

The Health Care & Social Assistance sector, while expanding, faces persistent cost pressures. Tariffs on imported medical equipment and elevated labor costs are squeezing margins. Despite improved supply chain performance, healthcare providers are absorbing price hikes or passing them to patients, risking long-term demand erosion. The sector's Business Activity Index remains in expansion, but employment is contracting, reflecting staffing challenges and margin compression.

Investment Implications:
- Exercise caution in healthcare equipment firms with weak balance sheets or exposure to imported components. Avoid overexposure to companies like Medtronic (MDT) or Stryker (SYK) without strong domestic supply chains.
- Prioritize defensive plays: Firms with recurring revenue models (e.g., telehealth platforms) or AI-driven efficiency solutions (e.g., Epic Systems) may outperform.
- Watch for restructuring: Margin compression could drive consolidation, favoring larger players with diversified portfolios.

Strategic Allocation: Balancing Risk and Reward

The November PMI data highlights a critical inflection point. While construction's overall contraction is concerning, its sub-sector outperformance in data centers and energy infrastructure offers a path to growth. Conversely, healthcare's resilience is tempered by structural cost challenges.

Action Plan:
1. Sector Rotation: Shift capital from underperforming construction (residential/commercial) to AI/data center-linked engineering.
2. Defensive Positioning: In healthcare, favor companies with recurring revenue and AI integration over those reliant on tariff-sensitive supply chains.
3. Macro Hedges: Use inverse ETFs (e.g., XHB) to offset construction risks and allocate to utilities or transportation (which saw strong November PMI readings).

Conclusion

The U.S. services sector is a mosaic of divergent trends. For investors, the key lies in granular analysis: identifying sub-sectors with structural growth (like data center construction) and avoiding those with deteriorating fundamentals (like cost-pressured healthcare equipment). By leveraging PMI data to inform sector rotation, investors can navigate the current economic landscape with precision and resilience.