U.S. Services Sector Gains Momentum: Sector-Specific Opportunities Amid Divergent Market Responses

The U.S. services sector is showing renewed vigor, with the August 2025 ISM Non-Manufacturing PMI hitting 52%, a 1.9-point rise from July. The New Orders index surged to 56.0, the highest in over a year, signaling robust demand. Yet, beneath this broad expansion lies a stark divergence: while sectors like Information and Wholesale Trade thrive, others such as Accommodation & Food Services and Construction face headwinds. For investors, this divergence offers both opportunities and cautionary tales.

Expanding Sectors: AI, Tariff-Driven Adjustments, and Holiday Prep

The Information sector is a standout, with its Business Activity Index at 55% and New Orders Index at 56%. Fueled by AI infrastructure demand and strategic inventory purchases, companies like Nvidia (NVDA) and Microsoft (MSFT) have seen their valuations soar. Nvidia's stock price, for instance, has surged over 20% year-to-date, reflecting its dominance in AI hardware. Investors should monitor to gauge its trajectory amid rising demand for data center capacity.

Wholesale Trade is another bright spot, with companies preparing for the holiday season by securing supplies ahead of tariff hikes. Prologis (PLD), a leader in industrial real estate, raised its 2025 outlook after reporting stronger-than-expected Q2 results. The sector's resilience is also evident in logistics ETFs like the iShares U.S. Transportation Average ETF (IYT), which has gained 8% in 2025.

The Arts, Entertainment & Recreation sector is benefiting from pent-up demand for live events and streaming content. Companies like Live Nation (LYV) and Electronic Arts (EA) have seen their stocks hit 52-week highs. However, staffing shortages and rising operational costs remain risks.

Contracting Sectors: Tariff Pressures and Labor Challenges

In contrast, the Accommodation & Food Services sector is struggling, with its Business Activity Index at 44.3% and Employment Index in contraction for three consecutive months. Restaurants like Red Robin (RRGB) and Jack in the Box (JACK) reported same-store sales declines, while tariffs on imported goods are squeezing margins. Investors should avoid overexposure to ETFs like the CBOE Restaurant ETF (EAT), which has underperformed broader markets.

The Construction sector is also contracting, with a Business Activity Index of 40.4% and employment challenges. Rising costs for imported materials and a sluggish housing market are key culprits. Companies like Lennar (LEN) face margin pressures, and reveals a 12% decline.

Investment Strategy: Capitalizing on Divergence

The ISM report underscores the importance of sector rotation. Investors should overweight Information and Wholesale Trade stocks, particularly those with strong AI exposure or supply chain resilience. For example, Sony (SONY)'s Gaming and Semiconductor segments have driven its outperformance, with operating margins rising sharply.

Conversely, underweight or avoid sectors facing structural headwinds. The Accommodation & Food Services sector's struggles are likely to persist until tariffs ease or labor markets stabilize. Similarly, Construction's recovery hinges on housing demand and material cost normalization.

Conclusion

The U.S. services sector is a mosaic of growth and stagnation. While AI-driven demand and tariff-driven inventory strategies are boosting Information and Wholesale Trade, other sectors grapple with inflation and labor shortages. Investors who align their portfolios with the momentum in high-growth areas while hedging against weaker sectors will be well-positioned to navigate this complex landscape. As always, a disciplined, data-driven approach is key.