Jacob Sonenshine

When offense is working, no one is much interested in so-called defensive stocks. That makes it a great time to add some safety to your portfolio.

Why defensives? The S&P 500, after all, has risen 18% from its April low after President Donald Trump rolled back a chunk of tariffs, As optimism rebounded, so did economically-sensitive, or cyclical sectors, including technology -- the Technology Select Sector SPDR exchange-traded fund has gained 30% over the same period, while the Industrial Select Sector SPDR ETF has risen 23%, and the Consumer Discretionary Select Sector SPDR ETF has advanced 22%.

The rally, however, has caused investors to abandon the defensive sectors they had embraced earlier this year. The Consumer Staples Select Sector SPDR ETF has risen 8.6%, the Utilities Select Sector SPDR ETF has gained 12%, and the Health Care Select Sector SPDR ETF has declined 0.2% These sectors don't see large swings in demand and earnings due to economic growth, a great trait to have when investors fear a recession -- or worse -- but not when investors are scrambling to capture upside.

That supports the idea that they could soon play catch-up to the broader market. Uncertainty around tariffs and the economy remains high despite the rally, and if the market starts to swoon these sectors could find themselves the right place to be at the right time. It doesn't hurt that their valuations are, well, undemanding. The Consumers Staples Select Sector SPDR, which owns steady-eddies such as Coca-Cola, Walmart, and Procter & Gamble, trades at 19.9 times earnings estimates for the next 12 months, below the S&P 500, which trades for just 21.4 times, a gap that is more than a full point greater than the average five-year discount to the market benchmark of 0.3. What's more, staples traded with a price/earnings ratio nearly 4 points higher than the S&P 500's during the bear market of 2022, suggesting room for upside if the selling resumes. Utilities, at 17.8 times, face a similar situation.

What's more, weakness for these defensive sectors have been the norm, not an outlier. Utilities, staples and healthcare have underperformed the S&P 500 annually over the past five years by 6.1 percentage points, 6.1 points, and 8.7 points, respectively, including reinvested dividends as artificial intelligence spurred massive gains in tech and even industrials. Now, the S&P 500 healthcare, staples and utilities stocks have seen their combined market value fall to 18% of the S&P 500's $50.2 trillion market cap. That's the lowest percentage since 2000, and down from a multiyear peak of more than 25%, according to Bank of America. Together, they suggest that the upside, when it comes, could be more sustained than in recent years.

Investors have been showing early interest in some of these areas. Staples and utilities ranked first and second for trading flows over the past month in the 16 categories Bank of America tracks. And though healthcare remained out of favor due to policy challenges from the Trump administration, those with little to no exposure to tariffs generally and China specifically could do well, says Adam Parker, founder and CEO at Trivariate Research.

Sometimes, defense is the best offense.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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June 03, 2025 01:30 ET (05:30 GMT)

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