U.S. Markit Services PMI Misses Forecast, Signaling Sector Divergence: Strategic Rotation in a Slowing Economy

The U.S. economy is entering a phase of uneven growth, as evidenced by the November 2025 Markit Services PMI reading of 54.1, which fell short of the forecasted 54.6 and marked the weakest expansion in five months. This divergence from the manufacturing sector—where the PMI stood at 51.9, also below expectations—highlights a critical inflection point for investors. While both sectors remain in expansion, the services sector's slowdown in new orders and employment growth, coupled with manufacturing's weaker production and inventory pressures, demands a recalibration of sector rotation strategies.

Understanding the Divergence

The services PMI's decline to 54.1 reflects a moderation in demand and labor dynamics. New orders grew at the fastest pace since early 2025, yet employment expansion eased as companies struggled to retain staff amid rising input costs (driven by tariffs and supply chain bottlenecks). Meanwhile, the manufacturing PMI's 51.9 reading, though still in expansion, signals a contraction in new orders and a buildup of unsold inventories. This asymmetry—services grappling with labor and pricing pressures while manufacturing faces demand weakness—points to a broader structural shift in economic momentum.

The key takeaway: services sectors with resilient demand (e.g., healthcare, retail) are outpacing manufacturing industries (e.g., industrial goods, construction). This divergence is not merely cyclical but reflects long-term trends such as digital transformation in services and global supply chain fragility in manufacturing.

Sector Rotation Strategies: Where to Allocate Capital

1. Overweight Services Sectors with Structural Tailwinds
   Sectors like healthcare, professional services, and e-commerce are benefiting from sustained demand despite macroeconomic headwinds. For example, healthcare services PMI components (e.g., business activity, new orders) remain robust, driven by aging demographics and telehealth adoption. Investors should consider ETFs like the XLV (Health Care Select Sector SPDR Fund) or individual stocks in companies with recurring revenue models.

1. Underweight Cyclical Manufacturing Exposures
   Manufacturing's weaker PMI reading, particularly in industries like industrial machinery and automotive, suggests a slowdown in capital expenditure. Tariffs and inventory overhangs are exacerbating this trend. Investors should reduce exposure to ETFs like the XLI (Industrial Select Sector SPDR Fund) and instead focus on defensive manufacturing sub-sectors (e.g., aerospace, which benefits from long-term government contracts).

1. Leverage Inflation-Linked Opportunities
   The services sector's elevated prices index (65.4 for November) indicates persistent inflationary pressures, particularly in labor and logistics. This creates opportunities in sectors like real estate (REITs) and utilities, which are less sensitive to interest rate volatility. Consider the IYR (iShares U.S. Real Estate ETF) or XLU (Utilities Select Sector SPDR Fund) for inflation hedging.

2. Monitor Employment-Driven Sectors
   The services sector's employment contraction (48.9 in November) underscores labor market fragility. However, sectors like education and professional services are bucking the trend, with companies investing in upskilling and automation. Target firms with strong ESG (Environmental, Social, Governance) metrics in these areas, as they are better positioned to navigate labor shortages.

Macro Risks and Tactical Adjustments

The Federal Reserve's policy stance and the resolution of the recent government shutdown will influence sector rotation. A dovish pivot could benefit high-dividend sectors like utilities and real estate, while a hawkish stance may pressure growth-oriented services. Additionally, the UPS plane crash in November and customs delays highlight the need for supply chain resilience in manufacturing, favoring companies with localized production.

Conclusion: Navigating the Divergence

The U.S. economy is no longer a monolith. As the services sector adapts to inflation and labor challenges while manufacturing grapples with demand weakness, investors must adopt a nuanced approach. Prioritize sectors with structural growth, hedge against inflation, and avoid overexposure to cyclical manufacturing. By aligning portfolios with these divergent trends, investors can capitalize on the next phase of the economic cycle.