Navigating the Durable Goods Divergence: Sector Rotation in a Fractured Manufacturing Landscape

The U.S. Core Durable Goods Orders report for October 2025 delivered a stark reminder of the fragility of the manufacturing sector. While core capital goods orders—excluding aircraft and defense—rose by 0.5%, the broader durable goods category plummeted by 2.2%, driven by a 6.5% collapse in transportation equipment orders. This divergence between resilient capital goods and volatile transportation sectors has created a fertile ground for sector rotation strategies, particularly as investors grapple with a slowing investment climate and policy-driven headwinds.

The Data: A Tale of Two Sectors

The October data revealed a sharp contrast. Non-defense capital goods excluding aircraft—a proxy for business investment—posted a modest 0.5% gain, exceeding the 0.4% consensus forecast. Shipments of core capital goods surged by 0.7%, signaling continued strength in machinery, fabricated metals, and industrial equipment. These sectors, bolstered by AI-driven automation and infrastructure spending, have shown resilience despite broader economic pressures.

Conversely, transportation infrastructure faced a perfect storm. Aircraft orders collapsed by 23.7%, with Boeing reporting just 15 orders in October compared to 96 in September. The decline in defense and non-defense aircraft, coupled with a 5.6% drop in capital goods and a 0.7% fall in primary metals, underscored the sector's vulnerability to policy shifts and global supply chain disruptions. The expiration of federal tax credits for electric vehicles and elevated financing costs further dampened demand for motor vehicles and parts, which rose only 0.1% in October.

Historical Precedent: Rotation in Action

History offers a blueprint for navigating such divergences. During the June 2025 Core Durable Goods Orders miss—when transportation equipment orders fell by 22.4%—core capital goods excluding transportation edged up 0.2%. This pattern repeated in July 2025, when core orders rose 1.1% despite a third consecutive decline in transportation equipment. Backtested strategies suggest that investors who shifted capital from transportation infrastructure to resilient core sectors during these periods outperformed those who maintained exposure to volatile transportation stocks.

The Trump-era tariff policies, including 25% levies on vehicle imports and 52.5% tariffs on non-compliant USMCA imports, have exacerbated these dynamics. Tariff stacking has inflated OEM costs by $4,275 per vehicle, pressuring distributors reliant on cross-border supply chains. Meanwhile, Japanese automakers—shielded by the U.S.-Japan trade deal—have gained a competitive edge, further marginalizing domestic producers.

Strategic Implications: Underweight Distributors, Overweight Infrastructure

The data points to a clear tactical shift. Distributors, which depend on stable demand and predictable supply chains, are increasingly exposed to volatility. Companies like Amazon and Walmart, which rely on just-in-time inventory models, face margin compression as shipping costs and delivery delays persist. The expiration of EV tax credits and rising interest rates compound these challenges, making distributors a high-risk bet in a weak investment climate.

In contrast, Transportation Infrastructure—particularly logistics tech and rail networks—offers a counterbalance. The rise in data center construction and AI-driven automation has spurred demand for efficient freight solutions. For example, the 4.1% year-over-year increase in core capital goods shipments in October highlights the sector's adaptability. Investors should prioritize infrastructure ETFs (e.g., IYT) and logistics firms (e.g., C.H. Robinson) that benefit from AI-driven efficiency gains.

Policy and Geopolitical Risks: A Double-Edged Sword

While the case for transportation infrastructure is compelling, investors must remain vigilant. The EU and China have retaliated with tariffs of their own, and U.S. trade negotiations with Mexico and Canada remain unresolved. A diversified portfolio with exposure to Japanese automakers (e.g., Toyota) and U.S. defense contractors (e.g., Lockheed Martin) can mitigate geopolitical risks.

Moreover, the restoration of 100% bonus depreciation for new investments has disproportionately benefited tech-driven infrastructure projects. This policy tailwind, combined with a 2.8% annualized rise in nonresidential investment in Q3 2025, suggests that the sector's growth trajectory is sustainable.

Conclusion: Rotating for Resilience

The October Core Durable Goods Orders report is a microcosm of a broader economic reality: manufacturing is fracturing, and sectors are diverging. Investors who underweight distributors and overweight transportation infrastructure—particularly logistics tech and rail networks—position themselves to capitalize on this divergence. As the Federal Reserve navigates inflation and potential rate cuts in 2026, agility in sector allocation will be paramount.

In a world where policy shifts and supply chain disruptions reign supreme, the ability to rotate between sectors is not just a strategy—it's a necessity. The data is clear: the future belongs to those who adapt.