Navigating Sector Divergence: Capital Allocation Strategies in a Slowing U.S. Economy

The U.S. economy in 2025 is marked by a stark divergence between sectors. While the service sector grapples with labor shortages, , and weakening demand, energy infrastructure and equipment/services are surging, driven by and grid modernization. For investors, this divergence presents a critical opportunity to reallocate capital toward resilient sectors while avoiding overexposure to vulnerable service industries.

The Service Sector: A Tale of Mixed Signals and Structural Weakness

Recent data paints a nuanced but troubling picture of the service sector. , signaling expansion, . Non-health care services, in particular, have underperformed, , . Trade-exposed sectors like professional services and wholesale trade have shed jobs, while leisure and hospitality face persistent staffing shortages.

The root causes are clear: erratic , a , and . The labor force participation rate remains below pre-pandemic levels, . These trends suggest a labor market that is increasingly fragile, with service-sector employment acting as a lagging indicator of broader economic stress.

Energy Infrastructure: A Bright Spot in a Deteriorating Landscape

In contrast, energy infrastructure has emerged as a standout performer. The Tema Electrification ETF (VOLT), focused on power generation for data centers, , . The Alerian MLP ETF (AMLP) and First Trust North American Energy Infrastructure Fund (EMLP) have also delivered double-digit returns, attracting billions in inflows. This strength is fueled by two megatrends:

1. : Global data center electricity consumption is projected to double by 2030, with U.S. . , creating a tailwind for energy infrastructure.
2. : The U.S. energy infrastructure, rated a D+ by the American Society of Civil Engineers, is in dire need of upgrades. This has sparked a “,” with utilities and midstream energy companies benefiting from fixed-fee contracts and stable cash flows.

Capital Allocation: Why Energy Infrastructure Outperforms

Energy infrastructure ETFs offer a compelling case for overweighting. Unlike traditional energy equipment and services (which underperformed the S&P 500 in 2025), infrastructure-focused funds are insulated from commodity price volatility. .

For example, , driven by robust cash flows and strategic buybacks. Meanwhile, , reflecting investor preference for stable, inflation-protected cash flows.

Strategic Recommendations for Investors

1. : Allocate capital to ETFs like VOLT, AMLP, and EMLP, which are positioned to benefit from AI-driven demand and grid modernization.
2. Underweight Service-Sector Exposure: Reduce exposure to non-health care services and trade-exposed industries, which face structural headwinds.
3. Monitor Policy Risks: While energy infrastructure is resilient, regulatory shifts (e.g., changes in nuclear energy support) could impact long-term returns.

Conclusion: A Sectoral Rebalancing Is Underway

The U.S. economy is undergoing a structural shift from a service-driven model to one anchored by energy infrastructure. As service-sector indicators weaken and policy uncertainty persists, investors must reallocate capital to sectors with durable demand and strong cash flow visibility. Energy infrastructure, with its alignment to AI, electrification, and grid upgrades, offers a compelling path forward in a slowing economy.

By prioritizing energy infrastructure and avoiding overexposure to vulnerable service industries, investors can navigate the current divergence and position portfolios for long-term resilience.