Navigating Tariff-Driven Inflation: Sector Rotation and Risk Mitigation in U.S. Services and Manufacturing

The Divergence: Services Thrive, Manufacturing Struggles

The U.S. economy in 2025 is marked by a stark divergence between the services and manufacturing sectors. The Services PMI® has remained in expansion territory for 13 of 14 months, hitting 52% in August 2025, driven by robust business activity (55%) and new orders (56%) [1]. This resilience contrasts sharply with the Manufacturing PMI, which has contracted for six consecutive months, registering 48.7% in August 2025. Tariffs on goods from China, Mexico, and Canada have exacerbated manufacturing woes, with respondents citing higher costs, supply chain disruptions, and reduced competitiveness [3].

The services sector’s outperformance is not accidental. While employment in services remains weak (46.5% in August), demand for digital infrastructure, logistics, and domestic supply chain solutions has surged. Tariffs have accelerated reshoring and nearshoring trends, creating opportunities for investors to capitalize on structural shifts.

Resilient Sub-Sectors: Data Centers, Logistics, and Domestic Supply Chains

1. Data Centers: The AI-Driven Gold Rush
The data center industry is experiencing a boom fueled by AI and cloud computing. Hyperscalers like Amazon, Microsoft, and Google are projected to invest $1.8 trillion in data center-related capital expenditures from 2024 to 2030 [5]. This growth is driven by GenAI’s insatiable demand for computing power, with inference workloads growing at a 122% compound annual rate [5].

Investors should prioritize companies with exposure to AI infrastructure, such as those providing data cleaning, LLM fine-tuning, or agentic AI solutions. Additionally, greenfield data center projects are attracting capital, with 25% of sector-specific funds allocated to new builds in Q2 2025 [2].

2. Logistics: Navigating Tariff-Driven Disruptions
The logistics sector is grappling with tariff uncertainty but remains a critical enabler of domestic supply chain resilience. The Logistics Managers’ Index (LMI) highlights expanding warehousing utilization and prices, while transportation capacity outpaces pricing growth, creating a mild freight inversion [1].

Nearshoring and automation are reshaping logistics. For example, Ford’s shift to Mexican steel suppliers and Walmart’s diversification into Southeast Asia and India illustrate how companies are mitigating tariff risks [1]. Investors should target logistics firms with expertise in third-party warehousing, automation, and predictive analytics, which are now used by 63% of organizations to optimize supply chain efficiency [1].

3. Domestic Supply Chains: The Reshoring Playbook
Tariffs have forced companies to reevaluate global sourcing strategies. Supplier diversification and friendshoring (e.g., shifting production to Mexico) are gaining traction. Apple’s $1 billion investment in Indian manufacturing and HP’s expansion into Thailand exemplify this trend [1].

For investors, the key is to identify firms with strong balance sheets and exposure to durable end-markets. The U.S. small-cap sector, with its domestic revenue focus, offers attractive valuations and potential benefits from deregulation or tax cuts [6].

Actionable Steps for Investors

1. Sector Rotation: Shift Capital to Services-Linked Sectors
2. Allocate to data center REITs (e.g., Digital Realty Trust) and logistics ETFs like the iShares U.S. Infrastructure ETF (IFRA) [1].

3. Prioritize companies with high gross margins and pricing power, such as those in industrial real estate or AI infrastructure [6].

4. Hedge Against Tariff Risks

5. Invest in tariff-resistant ETFs like the VanEck Durable High Dividend ETF (DURA) or Simplify NEXT Intangible Core Index ETF (NXTI) [3].

6. Consider private infrastructure funds for long-term, inflation-protected cash flows [2].

7. Leverage Policy Tailwinds

8. The CHIPS Act and Infrastructure Investment and Jobs Act (IIJA) are driving demand for domestic manufacturing and energy infrastructure [4]. Target firms benefiting from these policies, such as semiconductor manufacturers or renewable energy developers.

9. Adopt a Multi-Shoring Strategy

10. Diversify supply chain exposure by investing in companies with regionalized sourcing and digital supply chain tools [1].

Conclusion

Tariff-driven inflation is reshaping the U.S. economic landscape, creating winners and losers. While manufacturing remains pressured, the services sector—particularly data centers, logistics, and domestic supply chains—offers compelling opportunities for risk mitigation and growth. By reallocating capital to these resilient sub-sectors and leveraging policy tailwinds, investors can navigate uncertainty and position themselves for long-term success.

Source:
[1] August 2025 ISM® Services PMI® Report, [https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/august/]
[2] Infrastructure Quarterly: Q2 2025, [https://www.cbreim.com/insights/articles/infrastructure-quarterly-q2-2025]
[3] Trade War Winners: Who Benefits from Tariffs as Deadline Looms, [https://get.ycharts.com/resources/blog/2025-who-benefits-from-tariffs]
[4] 2025 Infrastructure Outlook, [https://www.bny.com/investments/sg/en/individual/news-and-insights/articles/2025-infrastructure-outlook-apac.html]
[5] Breaking Barriers to Data Center Growth, [https://www.bcg.com/publications/2025/breaking-barriers-data-center-growth]
[6] Mid-Year Outlook: Broader Equity Horizons and Income, [https://am.gs.com/en-lu/advisors/insights/article/2025/asset-management-mid-year-outlook-2025-equity-and-income]