Navigating the Durable Goods Divergence: Capital Allocation Shifts and Sector Opportunities in 2025

The July 2025 U.S. Core Durable Goods Orders report delivered a mixed but telling message for investors: while headline orders fell 2.8% month-over-month, the core segment (excluding transportation and defense) surged 1.1%, outpacing expectations. This divergence highlights a critical shift in capital allocation, with infrastructure-linked sectors and technology-driven industries gaining momentum even as traditional manufacturing faces headwinds. For investors, the data underscores a strategic inflection point—where policy-driven tailwinds and sector-specific vulnerabilities demand a nuanced approach to portfolio positioning.

The Resilience of Core Durable Goods: A Policy-Driven Tailwind

The core durable goods segment, which excludes volatile transportation and defense categories, has become a barometer for structural economic strength. In July, nondefense capital goods orders rose 1.1%, driven by robust demand in machinery, electrical equipment, and computer hardware. These gains are not accidental but reflect deliberate policy interventions.

The Bipartisan Infrastructure Law (BIL) and recent executive actions, such as President Trump's July 2025 Executive Order on data center permitting, are accelerating investments in grid modernization, AI infrastructure, and EV-related supply chains. For example, machinery orders climbed 1.8% in July, while electrical equipment orders rose 1.5%, aligning with the $73 billion in grid modernization funding under the BIL. Similarly, computer and technology orders surged 3.5%, fueled by demand for AI-enabled hardware and data center expansion.

Investors should note that these gains are underpinned by long-term trends. The U.S. energy transition, AI adoption, and the need for resilient infrastructure are creating a durable demand for capital goods. For instance, electrical equipment manufacturers like AEP (American Electric Power) and DTE (DTE Energy) are benefiting from grid upgrades, while machinery firms such as Caterpillar (CAT) and 3M (MMM) are seeing strong order backlogs tied to EV and semiconductor production.

Infrastructure Momentum: A Multi-Trillion-Dollar Opportunity

The infrastructure boom is not just a federal initiative—it's a capital stack revolution. The American Society of Civil Engineers (ASCE) estimates a $3.7 trillion investment gap to modernize U.S. infrastructure, with public-private partnerships (P3s) and value capture mechanisms filling the void. States like Georgia and Pennsylvania are leveraging low-interest loans and P3s to fast-track projects, from EV charging networks to smart grid installations.

For investors, this translates to opportunities in infrastructure-linked equities and ETFs. The iShares U.S. Infrastructure ETF (PAV) and the Invesco Industrial Select Sector ETF (INDU) have outperformed broader markets in 2025, reflecting the sector's resilience. Additionally, companies involved in modular construction and prefabrication—such as Katerra (KAT) and TPI Composites (TPIC)—are gaining traction as project timelines shorten and efficiency becomes paramount.

However, risks remain. Supply chain bottlenecks and labor shortages could delay projects, while regulatory uncertainty around environmental permitting (despite recent streamlining) may create volatility. Investors should prioritize firms with diversified supply chains and strong government contracts, such as Siemens Energy (SEN) and Schneider Electric (SU).

Automotive Sector Headwinds: Tariffs and Financing Costs Take a Toll

While infrastructure and tech sectors thrive, the automotive industry is under pressure. Motor vehicle and parts orders have declined 1% year-to-date, a drag on the headline durable goods report. This reflects a perfect storm of tariffs, supply chain disruptions, and rising financing costs. For example, the 10.3% monthly drop in transportation equipment orders in July was driven by import front-loading in anticipation of higher tariffs on EV components.

Tesla (TSLA) and legacy automakers like Ford (F) and General Motors (GM) are feeling the pinch. Tariffs on Chinese EV batteries and semiconductors have eroded profit margins, while high interest rates have dampened consumer demand. The automotive sector's struggles are a cautionary tale for investors: even as EV adoption accelerates, near-term headwinds from policy and financing could outweigh long-term growth potential.

Actionable Insights for Investors

The July durable goods report signals a clear reallocation of capital toward infrastructure and technology, with automotive and transportation sectors lagging. Here's how investors can adjust their exposures:

1. Overweight Infrastructure and Tech-Linked Sectors: Allocate to ETFs like PAV and INDU, and individual stocks in machinery, electrical equipment, and data center infrastructure.
2. Underweight Automotive and Transportation: Avoid overexposure to automakers and transportation equipment firms until tariffs and financing costs stabilize.
3. Monitor Policy Catalysts: Track developments in the BIL's implementation and the Federal Reserve's rate trajectory. A 100-basis-point shift toward neutral rates in Q4 2025 could further boost high-yield sectors.
4. Diversify Within Capital Goods: Focus on firms with exposure to AI, EV infrastructure, and grid modernization, such as NVIDIA (NVDA) for semiconductors or Enphase Energy (ENPH) for solar storage.

Conclusion

The U.S. Core Durable Goods Orders report for July 2025 is more than a data point—it's a roadmap for capital allocation in a transforming economy. As infrastructure spending accelerates and technology-driven sectors gain momentum, investors must balance optimism with caution. While the automotive sector faces near-term headwinds, the broader industrial base remains resilient, offering compelling opportunities for those who can navigate the shifting landscape. By aligning portfolios with policy-driven tailwinds and structural trends, investors can position themselves to capitalize on the next phase of U.S. economic growth.