Sector Rotation in Construction and Utilities: Navigating Mortgage Rate Volatility in 2025

The U.S. MBA 30-Year Mortgage Rate has surged to 6.68% as of August 20, 2025, underscoring persistent affordability challenges for homebuyers. This volatility, coupled with projections of a decline to 6.30% by 2026, has reignited debates about sector rotation opportunities in construction and utilities. Historical patterns reveal a clear inverse relationship between mortgage rate fluctuations and construction materials sector performance, while utilities face structural headwinds from electrification and policy shifts.

Construction Materials: A Cyclical Play on Rate-Driven Demand

When mortgage rates decline, construction materials firms historically gain approximately +7% in 28 days, driven by surges in refinancing activity and housing demand. For example, a 10-basis-point drop in the 30-Year Mortgage Rate to 6.39% in September 2025 triggered discussions about construction sector rotation. This dynamic is rooted in the economic principle that lower borrowing costs stimulate homebuyer activity, boosting demand for materials and construction-tech solutions.

Companies like Lowe's (LOW) and Autodesk (ADSK) are positioned to benefit from this interplay of cyclical and structural trends. Lowe's, a key player in home improvement, gains from increased DIY activity and professional contractor demand during housing booms. Autodesk, a leader in construction-tech software, offers tools like Building Information Modeling (BIM) that optimize efficiency, reducing labor and material costs—a critical advantage in a post-pandemic labor shortage environment.

The construction sector's resilience is further bolstered by green building incentives and tariffs on imported materials, which favor domestic producers. For instance, the 26% year-over-year increase in lumber prices (driven by tariffs and global supply pressures) has amplified demand for domestic construction materials. However, investors must remain cautious about raw material price volatility and labor constraints, which could compress margins.

Utilities: The Electrification Divide

The utilities sector's response to mortgage rate changes is nuanced. Gas utilities historically underperform during rate declines, with an average drop of -5% following unexpected rate cuts. This is driven by the acceleration of electrification, as households adopt energy-efficient appliances, heat pumps, and solar power. For example, the September 2025 rate drop exacerbated this trend, redirecting capital toward renewable energy projects and grid upgrades.

Electric utilities, in contrast, demonstrate resilience. Companies like NextEra Energy (NEE) and Dominion Energy (D) benefit from long-term contracts, regulated demand, and structural tailwinds such as the electrification of transportation and data centers. Policy frameworks like the Inflation Reduction Act (IRA) and the Infrastructure Investment and Jobs Act (IIJA) have locked in growth for electric infrastructure, while gas utilities face declining relevance.

The shift is not merely cyclical but structural. For instance, per-unit gas consumption has declined as new homes built during rate drops are increasingly electrified. This trend is reinforced by state-level clean energy mandates and grid modernization policies, which prioritize electric over gas infrastructure.

Market Sentiment and Strategic Allocation

The construction industry's fundamentals remain mixed. While 2024 saw a 6.6% increase in total output, 2025 growth is projected at 1.4%, reflecting tighter lending conditions and inflationary pressures. However, government investments under the IIJA and IRA are expected to drive growth in manufacturing and energy segments.

In the utilities sector, the U.S. Utilities Sector trades at a PE ratio of 20.3x (as of late September 2025), slightly below its 3-year average of 22.5x, suggesting a reasonable valuation. Earnings growth of 12% annually over the past three years underscores the sector's stability, though supply chain disruptions and material costs remain challenges.

Investment Recommendations

1. Overweight Construction Materials and Electrification Enablers: Position in firms like Lowe's and Autodesk, which benefit from cyclical housing demand and structural green building trends.
2. Underweight Gas Utilities: Avoid exposure to gas utilities due to declining demand and regulatory headwinds.
3. Balance with Electric Utilities: Allocate to electric infrastructure firms like NextEra Energy to capitalize on long-term electrification and policy-driven growth.

The Federal Reserve's anticipated 25-basis-point rate cut in September 2025 is expected to amplify these sector rotations. Investors should also monitor the Dodge Momentum Index and MBA Mortgage Applications for real-time signals on housing market sentiment.

In conclusion, the interplay between mortgage rate volatility and sector rotation presents a dual pathway for investors: construction materials and electrification enablers offer cyclical gains, while electric utilities provide structural growth. As the market anticipates further rate declines in 2026, aligning with these trends could yield significant returns in the evolving economic and environmental landscape.