Posted on 08/05/2025 11:14:25 AM PDT by lasereye
The U.S. ISM Non-Manufacturing PMI for July 2025 fell to 50.1, narrowly avoiding contraction territory but signaling a near-stagnant services sector. This 0.7-point drop from June's 50.8 and a 1.4-point miss relative to forecasts underscores a fragile economic backdrop. With price pressures surging to 69.9—the highest since October 2022—and employment indices contracting for four of five months, the data paints a stark picture of stagflationary risks. For investors, this creates a critical inflection point to reassess sector allocations and prioritize resilience over growth.
The Stagflationary Catalysts
The July report highlights three key drivers of the slowdown:
1. Tariff-Driven Inflation: The Trump administration's 10–41% tariffs on imports have pushed input costs to unsustainable levels, particularly in transportation, commodities, and labor-intensive industries.
2. Employment Weakness: The Services Employment Index plummeted to 46.4, the lowest since March 2025, reflecting hiring freezes and job losses in a sector that accounts for 70% of U.S. GDP.
3. Trade Disruptions: New export and import orders contracted sharply, with the New Exports Index at 47.9 and the Imports Index at 45.9, signaling a global trade slowdown.
These factors collectively point to a scenario where rising prices coexist with weak demand—a textbook stagflationary environment.
Sector Rotation: Overweighting Resilience
In such conditions, investors must pivot to sectors with pricing power, inelastic demand, and long-term tailwinds. Here's how to position a portfolio:
1. Infrastructure and Industrial Services Why: Government-led infrastructure spending (e.g., Biden's $2 trillion plan) and essential project demand provide a buffer against inflation.
2. Healthcare and Social Assistance Why: Inelastic demand for medical services and pharmaceuticals ensures steady cash flows. Firms with strong balance sheets can absorb cost increases.
3. Real Assets and Utilities Why: Real estate with inflation-linked leases and utilities with stable demand offer natural hedges against currency depreciation.
4. Consumer Staples and Defensive Tech Why: Essential goods and SaaS platforms with scalable solutions remain resilient.
Sectors to Underweight
Labor-Intensive Industries: Hospitality (e.g., Marriott (MAR)), education, and retail face margin compression from wage inflation and weak demand.
Financials: Inverted yield curves and net interest margin (NIM) pressures could weigh on banks, despite 2025's steepening curve.
High-Growth Tech: Firms with elevated P/E ratios (e.g., Meta (META), Alphabet (GOOGL)) may underperform as investors discount future earnings.
Trump’s tariffs are a weapon designed to stop other countries from putting tariffs on US goods. Some countries have already lowered their tariffs and some are hard headed. Trump will win in the end and all tariffs will be lower, the important ones are the tariffs on US goods which employ US workers.
Never underestimate Trump’s ability to overcome ...
The worst stagflation we had was under Jimmah Carter - a clueless democrat. Carter’s the idiot who gave Iran to the Mullahs, the Panama canal away for free and ushered in stagflation. He was a ‘nice guy with a great story’ and totally wrong for the job.
The Trump economy is different from the Biden economy.... just as the Clinton economy was different from the Daddy Bush economy. (Remember: It’s the economy, stupid?).
As the economy changes the proportion of each sector changes. Services to the Feds is big business. If DOGE is cutting back on those, then that sector has to adjust to the private sector customers and their needs....as an example.
Trump hopes that tariffs cause changes in manufacturing capacity...and then employment.
Also, regardless of Trump, the world is changing...Technology is changing...societal values is changing.
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