Concerned that geopolitical instability and the Federal Reserve’s fight against inflation could stifle economic development, U.S. stock investors are flocking to defensive sectors, which they believe can better weather storms and pay high dividends.
Even though the broader market has slid, the healthcare, utilities, consumer staples, and real estate sectors have all seen gains in April, following a trend that has seen them outperform the S&P 500 this year.
Investors are concerned that the Fed will choke the US economy as it tightens policy to combat rising consumer prices, so their appeal has grown in recent months.
Healthcare major Johnson & Johnson and staples stalwart Procter & Gamble are among the defensive sector businesses reporting profits next week, as the earnings season kicks into high gear. Streaming behemoth Netflix and electric-car producer Tesla will also report profits, which will be closely watched by investors.
Banks, tourism businesses, and other companies that profit from a strengthening economy, as well as high-growth and technology names that have led stocks higher for most of the last decade, should benefit from signs that U.S. corporate earnings would be stronger than expected this year.
In the past, defensive stocks have demonstrated their worth. During moments of economic uncertainty, the healthcare, utilities, and staples sectors outperformed the S&P 500 by as much as 15 to 20 percentage points, according to DataTrek Research.
New York Life Investments’ multi-asset team has recently switched its portfolios toward staples, healthcare, and utilities stocks, while reducing exposure to financials and industrials, according to Lauren Goodwin, economist and portfolio strategist.
Expectations of a more aggressive Fed have increased the likelihood that the current economic cycle may be shorter, which has hastened our allocation shift to defensive asset sectors, according to Goodwin.
Not all investors are negative about the economy’s prospects, and many believe that if the economy appears to be robust, momentum will rapidly shift to other areas of the market.
The rise in defensive stocks has pushed up their prices. According to Refinitiv Datastream, the utilities sector is trading at 21.9 times forward earnings forecasts, the highest level on record and well above its five-year average price-to-earnings ratio of 18.3 times. The staples sector is currently trading at an 11% premium to its five-year average forward P/E, while healthcare is trading at a 5% premium.