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 Hits 2.9% in July 2025, Driving Money Toward Construction as Norway’s Wealth Fund Divests Caterpillar and Five Israeli Banks
The U.S. Core PCE Price Index rose to 2.9% year-over-year in July 2025, the highest reading in five months, prompting investors to shift into sectors that tend to hold value when inflation is persistent. That shift comes as Norway’s sovereign wealth fund, the world’s largest at about $2 trillion, moved to divest its stake in heavy equipment maker Caterpillar and stakes in five Israeli banks amid an ethics review tied to conflict-related activities. At the same time, Caterpillar reported regionally weak sales and warned of moderating price gains.
Why the move into construction?
The stronger Core PCE print reinforced views that inflation pressures remain, with part of the persistence linked to trade-era tariffs and lingering supply chain bottlenecks. As a result, analysts and portfolio managers are discussing a strategic rotation toward inflation-linked sectors such as construction and engineering and away from sectors judged more exposed to inflation, notably healthcare services.
Construction and engineering firms are seen as better able to protect margins because they can pass rising material costs to clients and stand to benefit if central bank policy loosens later in the year. With the Federal Reserve signaling the possibility of rate cuts in Q4 2025, those firms could also access cheaper financing, a tailwind that may amplify their outperformance.
Policy and fiscal support underpinning demand
A pipeline of public funding reinforces the sector case. The 2022 Bipartisan Infrastructure Law allocated roughly $550 billion to roads, bridges and housing. State-level bond issuances add about $120 billion annually, bringing combined federal and state infrastructure-related spending to around $670 billion. That spending should sustain activity even as some private demand softens.
Historical analyses cited by market observers show construction stocks have outperformed the broader market by about 18% during previous inflationary shocks, including periods in the 1970s and the 2021–2022 surge. The iShares U.S. Construction Producers ETF (ITB) jumped roughly 8% in June 2025 after Core PCE-related market moves, reflecting rapid repositioning by some investors.
Pressure on healthcare providers
By contrast, healthcare services are struggling to absorb higher costs. Fixed reimbursement rates from Medicare and Medicaid limit providers’ ability to increase revenues, while private insurers have been resistant to substantial premium hikes. Labor costs in the sector rose about 6.2% year-over-year, and supply chain disruptions for medical supplies and pharmaceuticals have further squeezed margins. Backtests show healthcare services have underperformed the broader market by roughly 2.8% on average in the 60 days following inflationary shocks. Market reactions to earlier Core PCE moves included small share-price declines for large healthcare names.
Norwegian wealth fund divestments
The Norwegian Government Pension Fund Global decided to divest from Caterpillar and five Israeli banks after advice from its council on ethics. The council concluded there was an unacceptable risk linked to the use of equipment and financial services in situations tied to the conflict, and it recommended exclusion on those grounds. Prior to the sale, the fund held about a 1.17% stake in Caterpillar, valued at roughly $2.1 billion as of June 30. Stakes in the five Israeli banks were valued at a combined $661 million.
The banks affected include Hapoalim, Bank Leumi, Mizrahi Tefahot Bank, First International Bank of Israel and FIBI Holdings. The ethics review tied the financial services to construction activity in settlements that the council judged to be in breach of international law. International legal rulings and a multilateral diplomatic response to specific settlement plans have fed into the review.
Caterpillar’s results and outlook
Caterpillar reported that construction-related sales fell about 7% year-over-year. Regional revenue trends were weak across most markets: North America down about 11%, Europe/Africa/Middle East down about 15%, and Asia Pacific down around 12%. Latin America was a bright spot with revenue up about 12%
.
Company finance leadership signaled that price realization—the ability to maintain higher selling prices—was moderating and is expected to trend lower into the fourth quarter. Management expects lower sales in the Construction Industries segment to persist into Q4 but noted that unspent infrastructure funding from the IIJA and committed project pipelines should support demand over time. Company representatives did not immediately respond to requests for comment on the divestment decisions.
What investors are doing
Market advisers are recommending a tilt toward construction and infrastructure names while reducing exposure to healthcare services. The argument rests on cost-pass-through ability, fiscal support, and potential for cheaper financing if the Fed eases policy later in the year. Investors considering the shift should weigh company-specific fundamentals and regional risks linked to trade, geopolitics and regulatory reviews.
Frequently Asked Questions
What is Core PCE and why does it matter?
Core Personal Consumption Expenditures (PCE) excludes food and energy and is a key inflation gauge used by policymakers and markets to assess price trends and the likely path of interest rates.
Why would construction stocks benefit from higher inflation?
Construction firms often can pass higher material and labor costs to customers through contract terms, and public infrastructure spending provides stable demand. If central banks cut rates later, financing costs fall, further supporting the sector.
Why are healthcare providers at risk in this environment?
Healthcare providers face fixed public reimbursements and resistance from private insurers to large premium increases, making it harder to offset rising labor and supply costs.
What did Norway’s wealth fund do and why?
The fund sold its holdings in Caterpillar and five Israeli banks after an ethics review found a risk that their products and services were linked to activities that run counter to the council’s standards regarding conflicts and international law.
How have Caterpillar’s sales trended recently?
Caterpillar reported a 7% year-over-year drop in construction-related sales, with declines across most regions except Latin America, which saw an increase.
Key Facts at a Glance
| Item | Detail |
|---|---|
| Core PCE (July 2025) | 2.9% YoY (highest in five months) |
| Sector rotation | Shift toward construction & engineering, away from healthcare services |
| Federal/state infrastructure | $670 billion total (approx. $550B federal + $120B state bonds) |
| ITB ETF reaction | +8% in June 2025 |
| Caterpillar sales | -7% YoY construction-related; regional drops: NA -11%, EAME -15%, APAC -12%, LATAM +12% |
| Norwegian fund size | About $2 trillion |
| Norwegian fund holdings sold | Caterpillar stake valued ~$2.1 billion; five Israeli banks combined ~$661 million |
| Healthcare labor cost rise | 6.2% YoY |
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
