Resilient Housing Market Fuels Construction Gains as Luxury Sectors Face Headwinds: A Sector Rotation Strategy for 2025

The U.S. housing market, long a barometer of economic health, is showing signs of resilience in 2025, even as broader discretionary sectors like luxury goods struggle to maintain their earlier momentum. This divergence presents a compelling case for sector rotation—a strategic shift in capital from underperforming industries to those gaining traction. For investors, the contrast between the construction sector's rebound and the luxury goods industry's slowdown offers a roadmap for capitalizing on macroeconomic trends.

The NAHB Housing Market Index: A Barometer of Resilience

The National Association of Home Builders (NAHB) Housing Market Index (HMI) in July 2025 stood at 33, a marginal improvement from June's 32 but still well below the 50 threshold that signals optimism. While builder sentiment remains bearish, the index's gradual climb—projected to reach 38 by late 2025—reflects a stabilizing market. Key drivers include the Federal Reserve's rate cuts in late 2024, which brought the 30-year mortgage rate to 6.6% by year-end, and government stimulus through the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA).

Despite high interest rates and affordability challenges, housing completions rose 16.8% year-over-year in October 2024, and analysts forecast a 9% increase in existing home sales and 11% in new home sales for 2025. This resilience is translating to construction-related equities, which have outperformed the S&P 500 in 2025.

Construction Sector: A Tailwind of Policy and Demand

Public and private infrastructure spending is fueling the construction sector's rebound. As of October 2024, public construction spending rose 9.8% year-over-year, with non-residential and residential construction growing 9.8% and 9.3%, respectively. The U.S. government's $6.75 trillion fiscal spending in fiscal 2024 has prioritized roads, energy, and water infrastructure, creating a fertile environment for construction firms.

Four construction stocks have emerged as standout performers in 2025:
1. MasTec, Inc. (MTZ): Up 80.3% year-to-date (YTD), with 45.5% earnings growth expected.
2. Comfort Systems USA, Inc. (FIX): Surged 121% YTD, projecting 20.8% earnings growth.
3. Primoris Services Corporation (PRIM): Soared 143.5% YTD, with 17.7% earnings growth anticipated.
4. Construction Partners, Inc. (ROAD): Gained 120.3% YTD, forecasting 47.4% earnings growth.

These gains are underpinned by favorable borrowing conditions, infrastructure spending, and demand for decarbonization projects. Meanwhile, technological advancements like AI-driven project management and digital twins are improving efficiency, addressing labor shortages, and reducing costs.

Luxury Goods: A Sector in Retreat

In stark contrast to the construction sector's optimism, the luxury goods industry is grappling with a slowdown. After a decade of double-digit growth driven by price hikes and pent-up demand post-pandemic, the sector is now facing macroeconomic headwinds, particularly in China, its largest market. Growth is projected to contract in 2025, with annual gains expected to dip to 1-3% through 2027.

The shift is not merely cyclical but structural. Consumers are favoring experiences over physical goods, and brands that once relied on exclusivity are now competing in a saturated market. Overexposure has eroded the perceived value of luxury items, with clients demanding higher craftsmanship and personalized service. For investors, this signals a prolonged period of underperformance in discretionary sectors.

Strategic Sector Rotation: Where to Allocate Capital

The divergent trajectories of construction and luxury sectors highlight an opportunity for strategic reallocation. Here's how investors can position their portfolios:

1. Overweight Construction Equities: Prioritize firms benefiting from government infrastructure spending, such as Primoris and Construction Partners, which have demonstrated strong earnings momentum.
2. Underweight Luxury Sectors: Reduce exposure to luxury goods as demand softens and margins compress. Brands lacking agility in adapting to experience-driven consumption may lag further.
3. Hedge Against Inflation: Construction firms with pricing power and long-term infrastructure contracts are better positioned to navigate inflationary pressures than discretionary sectors.
4. Monitor Policy Catalysts: The success of construction stocks hinges on continued government spending and rate cuts. Investors should track the passage of new infrastructure bills and the Federal Reserve's policy trajectory.

Conclusion

The U.S. housing market's resilience in 2025 is a testament to the power of policy and sector-specific dynamics. While the NAHB HMI remains below optimism, construction-related equities are thriving, buoyed by infrastructure spending and rate cuts. Meanwhile, the luxury goods sector's slowdown underscores the importance of adapting to shifting consumer priorities. For investors, a strategic rotation into construction and away from discretionary sectors offers a path to capitalize on these trends—leveraging the former's growth while mitigating risks in the latter. As always, vigilance in monitoring macroeconomic shifts and policy developments will be key to sustaining this strategy through 2025 and beyond.