U.S. Service Sector Strength: Navigating Growth in Construction and Engineering Amidst Sector Rotation

The U.S. services sector has long been a cornerstone of economic resilience, and the latest ISM Non-Manufacturing New Orders data for December 2025 underscores its enduring vitality. With a reading of 57.9, the index not only signals robust expansion but also highlights a critical shift in sector dynamics. For investors, this data offers a roadmap to capitalize on high-growth areas like Construction and Engineering while hedging against underperforming segments such as Food Products.

The ISM Signal: A Sector in Motion

The ISM Services New Orders Index has expanded for 34 of the last 36 months, a testament to the sector's ability to adapt to macroeconomic headwinds. December's 57.9 reading—a five-point jump from November—reflects a surge in end-of-year bookings and seasonal demand. This momentum is not uniform, however. While nine industries reported growth, six, including Construction and Accommodation & Food Services, lagged.

The key takeaway? Sector rotation is accelerating. Investors who align their portfolios with the ISM's insights can position themselves to benefit from the strongest performers while mitigating risks in weaker areas.

Construction and Engineering: A Case for Growth

Construction and Engineering, though down in December, remain critical to the long-term health of the economy. Infrastructure spending, driven by federal initiatives and private-sector demand, continues to fuel activity. The sector's underperformance in the latest report may present a buying opportunity for investors who recognize its foundational role in economic expansion.

Consider the broader context:
- Public-Private Partnerships (P3s) are gaining traction, with projects like smart cities and renewable energy infrastructure creating demand for engineering expertise.
- Labor shortages in skilled trades are driving wages and productivity gains, which could translate to higher margins for firms that can scale efficiently.

For investors, this means prioritizing companies with exposure to construction materials, engineering services, and project management. A

visualizes the sector's potential.

Hedging Against Underperformers: The Food Products Dilemma

While Construction faces temporary headwinds, the Accommodation & Food Services sector's decline is more concerning. The 12-month decline in new orders for this sector—part of a broader trend of shifting consumer behavior—suggests structural challenges. Rising labor costs, supply chain disruptions, and a shift toward home cooking post-pandemic are eroding margins.

Investors should consider reducing exposure to food-related equities or hedging with short-term options. For example, a analysis reveals volatility tied to commodity prices and demand fluctuations. Diversifying into sectors with more stable cash flows—such as healthcare or technology—could offset these risks.

Strategic Sector Rotation: A Data-Driven Approach

The ISM data provides a clear framework for sector rotation:
1. Overweight Construction and Engineering: Look for firms with strong balance sheets and exposure to infrastructure spending.
2. Underweight Food Services: Avoid overleveraged players in the hospitality and food retail space.
3. Balance with High-Performers: Sectors like Finance & Insurance and Health Care reported strong new orders, offering defensive plays.

A illustrates how construction-related stocks can outperform in a pro-growth environment.

Conclusion: Positioning for the New Year

The December ISM report is more than a snapshot—it's a signal. As the services sector enters 2026 with momentum, investors who act decisively on sector-specific insights will be best positioned to navigate volatility. By leaning into Construction and Engineering while hedging against underperforming areas like Food Products, portfolios can balance growth and stability.

The market's next move may hinge on how quickly these sector dynamics play out. For now, the data is clear: the U.S. services economy is not just surviving—it's building for the future.