United States, August 31, 2025
News Summary
A stronger-than-expected Core PCE inflation reading pushed investors to reweight portfolios toward construction and engineering and away from sectors with limited pricing power like healthcare services. Construction firms can better pass through rising material and labor costs, and public infrastructure spending provides steady demand. The market rotation has been reinforced by expectations of potential Fed easing later in the year, which could lower financing costs. Separately, Norway’s large sovereign fund sold stakes in a major heavy equipment maker and five Israeli banks after an ethics review, adding a geopolitical dimension to investor decisions.
Core PCE at 2.9% in July 2025 Spurs Shift Toward Construction; Norway’s $2T Fund Drops Caterpillar and Five Israeli Banks
Key takeaway: A hotter-than-expected inflation reading in July 2025 has accelerated investor interest in construction and engineering stocks while piling pressure on healthcare providers. At the same time, Norway’s roughly $2 trillion sovereign wealth fund has moved to divest from a major equipment maker and five Israeli banks for ethical and legal concerns, adding a geopolitical layer to market risks.
Top of the story: inflation and market rotation
The U.S. Core Personal Consumption Expenditures (PCE) Price Index rose to 2.9% year-over-year in July 2025, the highest monthly reading in five months. That persistent inflation reading has prompted portfolio managers to consider shifting capital toward sectors that typically perform well during inflationary periods—most notably construction and engineering—and to trim exposure to areas that struggle to pass on cost increases, such as healthcare services.
Analysts note that lingering post-pandemic supply chain bottlenecks and tariffs put in place during the prior administration have helped keep input costs elevated. With the Federal Reserve signaling the possibility of rate cuts in the fourth quarter of 2025, investors are weighing a tactical overweight in construction and infrastructure stocks and a corresponding underweight in healthcare providers to capture possible risk-adjusted gains.
Why construction looks attractive
Construction and engineering firms can often pass rising material and labor costs to clients through contract terms, a trait known as cost-pass-through capability. That makes the sector relatively resilient in inflationary stretches. The ongoing public funding picture also supports demand. Federal and state infrastructure spending combined is estimated at approximately $670 billion annually, derived from a $550 billion federal allocation under the 2022 bipartisan infrastructure law and roughly $120 billion in state-level bond issuance for infrastructure.
Historical backtests referenced by market watchers show construction stocks have outperformed the broader market by about 18% during past inflationary shocks, including the 1970s stagflation era and the 2021–22 surge. Market flows echoed that view in June 2025 when the iShares U.S. Construction Producers ETF (ITB) jumped about 8% after inflation data drew renewed attention to the sector. Analysts also point out that expected Fed rate cuts could improve access to cheaper financing for construction projects, further strengthening the sector’s outlook.
Pressure on healthcare services
The healthcare services sector is described as more vulnerable to rising costs. Fixed reimbursement rates from major public payers limit providers’ ability to pass on higher expenses. Private insurers have also been resistant to sharp premium increases, putting further strain on margins. Labor costs are a major factor: healthcare labor expenses increased about 6.2% year-over-year, and supply chain issues affecting items such as personal protective equipment and certain pharmaceuticals have squeezed profitability.
Short-term market reactions have included declines in major healthcare-related stocks following earlier inflation updates, with one large insurer off about 1.2% and a major pharmaceutical company down roughly 0.8% in the immediate aftermath of a June inflation release. Backtests show healthcare services have underperformed the S&P 500 by an average of 2.8% over 60-day windows following inflation shocks, reinforcing the tactical case to reduce exposure.
Norway’s sovereign fund divests Caterpillar and five Israeli banks
The world’s largest sovereign wealth fund, with assets near $2 trillion, has moved to divest its holdings in a major heavy-equipment manufacturer and five Israeli banks after an ethics review related to the war in Gaza and activities in the occupied West Bank. The ethics council that reviewed the holdings concluded the equipment maker’s products were being used in ways that contributed to serious rights violations in conflict situations and found that the company had not taken sufficient measures to prevent such use.
Before the sale, the fund held around 1.17% of the equipment maker, valued at about $2.1 billion as of June 30. Stakes in the five Israeli banks—identified in the divestment—totaled roughly $661 million. The ethics panel highlighted that the banks’ financing activities were linked to construction in settlements considered to be in breach of international law. Those settlements were the subject of a recent international court finding and a multilateral diplomatic protest after plans for a 12 sq km project known as E1—envisioning about 3,400 new homes—drew condemnation from a group of countries.
Caterpillar’s regional sales weakness
The equipment maker reported that construction-related sales fell about 7% year-over-year. Regionally, revenues were down roughly 11% in North America, 15% in Europe, Africa and the Middle East, and 12% in Asia Pacific, while Latin America increased about 12%. Company finance leadership said price realization has begun to moderate and is expected to trend lower into the fourth quarter of 2025, with weaker construction-industry sales likely to persist near term. Company executives also noted that federal infrastructure funding and unspent allocations from the 2022 infrastructure law should help support demand over coming quarters.
Bottom line for investors
The mix of persistent inflation readings, the prospect of Fed rate cuts later in 2025, large public infrastructure funding, and specific corporate and geopolitical developments has created a two-pronged market theme: favor inflation-linked, cost-pass-through sectors such as construction and engineering, and reduce exposure to inflation-sensitive areas like healthcare services until margins stabilize. Portfolio moves should consider both macro signals and firm-level fundamentals, including regional demand trends and any regulatory or reputational risks tied to geopolitical events.
FAQ
Q1: What does a 2.9% Core PCE reading mean for markets?
A 2.9% Core PCE indicates inflation remains above typical targets and can lead investors to prefer sectors that pass costs to customers, such as construction, while avoiding sectors with fixed reimbursements like many healthcare providers.
Q2: Why are construction stocks favored when inflation rises?
Construction firms can often adjust contract prices or use escalation clauses to pass material and labor cost increases to clients. Public infrastructure spending and potential cheaper financing if rates fall can also support demand.
Q3: How does the Norwegian fund’s decision affect companies?
Divestment by a large sovereign fund can dent investor confidence and put selling pressure on the shares involved, especially when the reasons relate to ethics or international law. It can also trigger greater scrutiny of corporate practices.
Q4: Should individual investors change their portfolios now?
That depends on personal goals, risk tolerance and time horizon. The recent data supports a tactical tilt toward construction and away from inflation-sensitive healthcare, but longer-term allocations should align with overall financial plans and diversification needs.
Q5: What are the main risks to the construction sector?
Risks include slowing public or private spending, rising interest rates before cuts materialize, supply chain interruptions, and regulatory or geopolitical developments that affect large projects or company reputations.
Key features at a glance
| Item | Detail |
|---|---|
| Core PCE (July 2025) | 2.9% YoY — highest in five months |
| Market tilt | Overweight construction/engineering; underweight healthcare services |
| Public infrastructure support | $550B federal IIJA allocation + $120B state bond issuance = $670B |
| ETF reaction | ITB rose ~8% in June 2025 after inflation focus |
| Healthcare pressures | Labor costs up 6.2% YoY; fixed public reimbursements limit pricing |
| Norwegian fund action | Divested from major equipment maker (stake ~1.17%, valued ~$2.1B) and five Israeli banks (combined ~$661M) for ethics concerns |
| Caterpillar sales | Construction-related sales down 7% YoY; regional declines: NA -11%, EAME -15%, APAC -12%, LatAm +12% |
Deeper Dive: News & Info About This Topic
Additional Resources
- Al Jazeera: Norway fund divests from Caterpillar
- Wikipedia: Caterpillar Inc.
- Reuters: Caterpillar quarterly profit falls
- Google Search: Caterpillar quarterly profit 2025
- Construction Dive: Caterpillar’s U.S. sales drop, construction demand slows
- Google Scholar: Caterpillar construction equipment sales 2025
- Caterpillar (Corporate): Construction — National Mall press release
- Encyclopedia Britannica: Caterpillar Inc.
- Financial Times: Coverage on Caterpillar / divestment (paywall)
- Google News: Norway fund Caterpillar divestment
