Strategic Sector Rotation in a Post-PMI Expansion Environment: Overweighting Construction, Cautious Underweighting of Healthcare

The U.S. Markit Manufacturing PMI has long served as a barometer for manufacturing health, but its implications extend far beyond the factory floor. As of August 2025, the PMI reading of 48.7—a 0.7-point increase from July—signals a contraction in manufacturing for the sixth consecutive month. Yet, this “PMI surprise” (falling short of the 49.0 consensus forecast) reveals a nuanced story: while production and employment remain in contraction, new orders have expanded for the first time in six months. This divergence offers a critical lens for investors to reassess sector positioning, particularly in a post-PMI expansion environment.

The PMI as a Sector Rotation Signal

The PMI's subcomponents—new orders, production, and employment—act as leading indicators for sector-specific trends. In August, the New Orders Index surged to 51.4, a 4.3-point jump, while the Production Index plummeted to 47.8. This contrast suggests that demand is stabilizing, but capacity constraints persist. Historically, such scenarios have favored sectors insulated from manufacturing volatility, such as Construction and Engineering, while sectors reliant on global supply chains, like Healthcare Equipment and Supplies, face headwinds.

Why Overweight Construction and Engineering?

The Construction and Engineering sector has demonstrated remarkable resilience during prolonged PMI contractions. Between 2020 and 2025, the sector grew at a 4.1% compound annual growth rate (CAGR), reaching a $3.7 trillion market size. This growth was driven by infrastructure spending, government stimulus (e.g., the 2021 Infrastructure Investment and Jobs Act), and the sector's ability to pass on rising input costs to clients.

During the 2025 PMI contraction, construction activity remained robust, particularly in nonresidential and civil engineering projects. For example, the heavy and civil engineering subsector benefited from long-term infrastructure contracts, which are less sensitive to short-term economic cycles. Additionally, the sector's geographic concentration near population centers ensures steady demand for housing, commercial buildings, and public works.

Investors should consider overweighting construction-related equities, such as Bechtel Group (BHI) or AECOM (ACOM), which have historically outperformed during PMI contractions. These firms are positioned to capitalize on the $1.2 trillion in infrastructure spending projected over the next decade.

Cautious Underweighting of Healthcare Equipment and Supplies

While the Healthcare Equipment and Supplies sector is critical to long-term demand, its performance during PMI contractions has been mixed. The sector's reliance on global supply chains, imported components, and price-sensitive demand makes it vulnerable to tariff-driven inflation and weak manufacturing activity. For instance, during the 2025 PMI contraction, healthcare equipment manufacturers faced delays in raw material procurement and rising tariffs on imported machinery, squeezing margins.

Historical data also suggests that healthcare equipment demand lags behind broader economic recovery. During the 2020–2021 PMI expansion, the sector saw a temporary boost from pandemic-related medical equipment demand, but this was followed by a sharp correction as the economy normalized. With the current PMI contraction showing no signs of abating, investors should adopt a cautious stance.

Consider reducing exposure to companies like Medtronic (MDT) or Stryker (SYK) until the PMI stabilizes above 50. Instead, focus on defensive healthcare subsectors, such as pharmaceuticals or telehealth, which are less tied to manufacturing cycles.

The Broader Economic Context

The PMI's 48.7 reading, while below 50, remains above the 42.3 threshold historically correlated with overall economic expansion. This suggests that the U.S. economy is still growing, albeit at a modest 1.8% annualized rate. However, the manufacturing sector's contraction—driven by tariffs, high material costs, and weak export demand—creates a fragile environment.

For investors, this duality underscores the importance of sector rotation. Construction and Engineering, with its ties to infrastructure and population-driven demand, offers a hedge against manufacturing volatility. Conversely, Healthcare Equipment and Supplies, while essential, requires careful timing to avoid margin pressures during prolonged contractions.

Conclusion: Positioning for the Next Phase

The latest PMI surprise—a modest 48.7 reading—highlights the need for strategic sector positioning. Overweighting Construction and Engineering aligns with long-term infrastructure tailwinds and policy-driven growth. Meanwhile, a cautious underweighting of Healthcare Equipment and Supplies mitigates risks from supply chain disruptions and margin compression.

As the PMI inches closer to the 50 expansion threshold, investors should remain agile, leveraging sector-specific insights to navigate the evolving economic landscape. In a post-PMI expansion environment, the key to outperformance lies in balancing resilience with adaptability.