Navigating Divergent Sector Impacts: U.S. Non-Defense Capital Goods Orders and Strategic Portfolio Adjustments

The U.S. non-defense capital goods orders (excluding aircraft) have emerged as a critical barometer of industrial investment, revealing stark divergences between the construction and chemical sectors in 2025. While the restoration of 100% bonus depreciation under the One Big Beautiful Bill Act (OBBBA) has spurred a 1.10% surge in orders for construction-related machinery and infrastructure, the chemical industry has lagged, constrained by persistent underperformance and structural challenges. For investors, these divergent trends demand a recalibration of portfolio allocations, favoring capital-intensive construction projects while hedging against chemical sector headwinds.

Construction: A Tax-Driven Renaissance

The OBBBA's reinstatement of full expensing for short-lived assets has catalyzed a construction boom, particularly in data center development. By allowing firms to deduct 100% of the cost of qualifying property in the first year, the policy has incentivized rapid deployment of equipment and infrastructure. Non-defense capital goods shipments excluding aircraft rose 0.7% in October 2025, with core orders showing four consecutive gains—a proxy for robust business confidence.

Data center construction, a key beneficiary, has seen a surge in debt issuance as companies shift from cash-flow reliance to leveraged growth. While the backlog of projects remains substantial, the sector's momentum is underpinned by demand from AI and cloud computing. Investors should prioritize firms like Caterpillar (CAT) or Turner Construction, which specialize in heavy machinery and industrial infrastructure.

Chemical Industry: Structural Headwinds and Policy Gaps

In contrast, the chemical sector has struggled to capitalize on the OBBBA's incentives. Despite a 2.8% annualized growth in nonresidential investment during Q3 2025, the sector remains underperforming due to elevated input costs, regulatory hurdles, and limited demand for capital-intensive upgrades. The QPP (Qualified Production Property) provision, which allows expensing of manufacturing facilities, has had minimal impact on chemical producers, as many facilities predate the 2025 construction cutoff.

Moreover, the phase-out of green energy incentives—such as the 179D deduction—has disproportionately affected chemical plants reliant on energy-efficient retrofits. With interest rates still elevated and underwriting standards tight, financing for capital projects remains costly. Investors should adopt a cautious stance toward chemical giants like Dow (DOW) or LyondellBasell (LYB), favoring dividend yields over growth bets.

Strategic Portfolio Adjustments

1. Overweight Construction and Industrial Real Estate: Allocate to ETFs like XLB (Materials Select Sector SPDR) or IYR (iShares U.S. Real Estate ETF) to capture construction-led growth.
2. Underweight Chemicals: Reduce exposure to cyclical chemical stocks until demand for feedstocks and specialty chemicals rebounds.
3. Hedge Against Inflationary Pressures: Invest in Treasury Inflation-Protected Securities (TIPS) or commodities like copper, which are critical for construction.
4. Monitor Policy Shifts: The OBBBA's QPP window closes in 2031, creating urgency for industrial construction projects. Track debt issuance trends in the fourth quarter of 2025.

Conclusion

The U.S. non-defense capital goods landscape in 2025 underscores a tale of two industries: construction, buoyed by tax incentives and technological demand, and chemicals, hampered by structural bottlenecks. Investors must act decisively, tilting portfolios toward sectors with clear policy tailwinds while avoiding overexposure to lagging industries. As the Federal Reserve's rate cuts in late 2025 begin to ease financing costs, the construction sector's momentum is likely to outpace the chemical industry's recovery, making strategic reallocation a necessity for 2026.