Strategic Asset Allocation in a Divergent Wage Growth Landscape: Sector Rotation Insights for 2025

The U.S. labor market in December 2025 paints a nuanced picture of wage growth, with divergent trends across sectors offering critical clues for strategic asset allocation. As investors navigate a post-pandemic economy, understanding these disparities is essential for optimizing sector rotation strategies. The Bureau of Labor Statistics (BLS) data reveals that average hourly earnings (AHE) for all private nonfarm employees rose 3.8% year-over-year, but this growth is far from uniform.

The Wage Growth Divide: High-Performers and Laggards

The information (IT) sector stands out as a standout, with AHE surging 5.04% to $53.61 per hour. This outperformance reflects sustained demand for tech-driven innovation and digital transformation, particularly in cloud computing, AI, and cybersecurity. Conversely, leisure and hospitality—despite a 3.93% wage increase—remains the lowest-earning sector at $23.28 per hour, underscoring structural challenges in attracting skilled labor.

The goods-producing sector (construction, manufacturing, mining) posted a 4.09% AHE gain, driven by infrastructure spending and supply chain normalization. Meanwhile, production and nonsupervisory workers saw stagnant growth, with AHE rising just 0.3% to $31.76—a stark contrast to the 3.8% average. This divergence highlights the importance of distinguishing between supervisory and non-supervisory roles when analyzing sector health.

Sector Rotation: Aligning Portfolios with Labor Market Signals

1. Overweight Technology and Goods-Producing Sectors
   The IT sector's wage growth aligns with robust revenue expansion in tech stocks. Companies in software, semiconductors, and AI are likely to benefit from higher compensation in their workforce, which fuels R&D and product innovation. Similarly, goods-producing industries—particularly construction and manufacturing—show wage gains that correlate with strong capital expenditure and infrastructure spending.

1. Underweight Leisure and Retail
   While leisure and hospitality added 47,000 jobs in December 2025, its wage growth lags behind inflation-adjusted earnings. Retail trade, which lost 25,000 jobs in December, faces margin pressures from e-commerce and shifting consumer behavior. Investors should remain cautious in these sectors unless valuations offer compelling downside protection.

2. Balance with Financial and Professional Services
   The financial activities sector (average AHE of $48.53) and professional services ($45.07) offer a middle ground. These industries benefit from stable demand for financial planning, legal services, and administrative support, with wage growth (3.5–3.8%) matching broader economic trends.

Strategic Asset Allocation: A Data-Driven Approach

To capitalize on these trends, investors should adopt a tilted portfolio that emphasizes sectors with wage growth outpacing inflation. For example:
- Equity Exposure: Increase allocations to IT and goods-producing ETFs (e.g., XLK, XLP) to capture earnings momentum.
- Fixed Income: Consider sector-specific corporate bonds in high-growth industries, where credit quality remains strong.
- Alternatives: Hedge against wage stagnation in lower-earning sectors by allocating to real estate or commodities, which benefit from inflation-linked cash flows.

The Risks of Inaction

Ignoring sector-specific wage trends can lead to suboptimal returns. For instance, the retail sector's 25,000-job loss in December 2025 signals ongoing structural shifts, while the IT sector's 5.04% wage growth suggests continued outperformance. A passive, broad-market approach may underperform in an environment where sector rotation is key.

Conclusion: Wage Growth as a Strategic Compass

The December 2025 AHE data underscores the importance of granular labor market analysis in asset allocation. By prioritizing sectors with strong wage growth—particularly IT and goods-producing—investors can align their portfolios with industries poised for sustained expansion. Conversely, sectors with flat or lagging wages require careful scrutiny. As the economy evolves, agility in sector rotation will remain a cornerstone of resilient, growth-oriented investing.