Repositioning Portfolios: Sector Rotation Strategies in Response to Weaker U.S. Consumer Demand

The U.S. consumer, long the backbone of economic growth, has entered a phase of cautious recalibration. With personal consumption expenditures (PCE) contracting in May 2025—the first decline since January—and discretionary spending under pressure, investors must rethink traditional sector allocations. The data paints a clear picture: consumers are trading down, delaying purchases, and prioritizing essentials. For portfolio managers, this signals a critical juncture for sector rotation—a strategic shift toward defensive and value-driven industries while hedging against volatile discretionary segments.

The Shifting Consumer Landscape

The latest PCE data reveals a stark divergence in spending patterns. Goods spending, particularly for durable items like motor vehicles and electronics, has become increasingly volatile. Durable goods saw a 1.8% plunge in May 2025, reversing a 0.4% gain in April. Meanwhile, services spending, while modest, has shown resilience, driven by non-discretionary outlays on housing, healthcare, and utilities. This dichotomy underscores a broader trend: consumers are prioritizing necessity over luxury.

The automotive sector, for example, faces headwinds as households delay vehicle purchases. Tesla (TSLA), while still a market leader, may see slower demand growth as budget constraints tighten. Conversely, companies in the healthcare and utilities sectors—such as UnitedHealth Group (UNH) or Dominion Energy (D)—are poised to benefit from inelastic demand. These industries, often considered “defensive,” offer stability in uncertain times.

Sector Rotation: From Vulnerability to Resilience

1. Defensive Sectors: Consumer Staples and Healthcare
   Consumer staples remain a cornerstone for investors. With 40% of consumers maintaining spending on essentials like groceries and gasoline, companies like Procter & Gamble (PG) or Coca-Cola (KO) are well-positioned. Healthcare, another essential sector, is also gaining traction. Rising demand for telemedicine and pharmaceuticals—coupled with an aging population—makes this industry a long-term bet.

2. Value-Play Sectors: Discount Retail and Private Labels
   As 75% of consumers engage in trade-down behavior, discount retailers like Dollar General (DG) and Walmart (WMT) are seeing increased foot traffic. Private-label brands, which offer cost-effective alternatives to premium products, are also gaining market share. For instance, Target's (TGT) “Cartwheel” program has attracted budget-conscious shoppers, illustrating the potential of value-driven strategies.

3. Services Sectors: Utilities and Housing
   Services tied to essentials—such as utilities and residential construction—are outperforming. With housing demand driven by low inventory and stable mortgage rates, companies like Lennar (LEN) could see sustained growth. Utilities, meanwhile, benefit from their role in everyday life and their ability to generate consistent cash flows.

4. Hedging Against Inflation: Commodities and Real Estate
   The PCE Price Index rose 2.6% year-over-year in June 2025, reflecting persistent inflation. Investors should consider sectors that can hedge against rising costs. Gold (GLD) and real estate investment trusts (REITs) like Simon Property Group (SPG) offer inflation protection. REITs, in particular, benefit from long-term leases and asset appreciation.

5. Avoiding Discretionary Sectors: Luxury and Non-Essentials
   Discretionary sectors—such as luxury fashion (e.g., LVMH, LVMHF) and high-end travel—are vulnerable to weaker demand. While millennials and Gen Z may splurge on travel, this trend is uneven and seasonal. Investors should trim exposure to these segments until broader economic confidence stabilizes.

The Generational Divide: A Strategic Lens

Generational behavior further complicates sector dynamics. Gen Z and millennials, more adaptable to economic shifts, are driving demand for secondhand goods and value brands. Meanwhile, baby boomers, with their entrenched spending habits, are less likely to trade down. This divide suggests a nuanced approach: overweighting value sectors for younger demographics while maintaining exposure to traditional staples for older cohorts.

Navigating the Path Forward

The U.S. consumer is not in retreat but in recalibration. With tariffs and inflation lingering as key concerns, the focus must shift to sectors that align with evolving demand. Defensive and value-driven industries offer a bulwark against uncertainty, while discretionary segments require careful scrutiny.

For investors, the message is clear: rotate into sectors that mirror the current economic reality. Diversify across essentials, value plays, and inflation-protected assets, while underweighting vulnerable discretionary categories. By aligning portfolios with the realities of weaker consumer demand, investors can position themselves for stability and growth in the months ahead.

As always, timing and balance are critical. The goal is not to chase volatility but to build resilience—a strategy that rewards patience and insight in a rapidly shifting landscape.