MW These stock-market sectors are dominating the S&P 500 so far this year as investors play defense

By Isabel Wang

It may be time for investors to shore up portfolios with defensive stocks - but their appeal goes beyond just providing protection

Some previously unloved corners of the U.S. stock market have quietly emerged as top performers on the S&P 500 this year, reshaping Wall Street as nontech names have finally received long-awaited credit for driving the large-cap index to new heights.

Shares of healthcare, consumer-staples and utilities companies are among the best stock-market performers in the early months of 2025. The S&P 500's healthcare sector XX:SP500.35 has popped 7.1% so far this year, while the broader index SPX has gained a modest 1% in the same period, according to FactSet data.

"The last time healthcare was the best sector for a calendar year was 2018, when it gained around 5% versus the 6% return for the S&P 500," said Jonathan Krinsky, chief market technician at BTIG. "Interestingly, that was another year that saw heightened volatility amidst geopolitical uncertainty. While it's far too soon to tell whether healthcare will be 2025's best sector, for now it fits the bill as a somewhat defensive group that is likely underowned given its multiyear downtrend versus the S&P 500."

Other defensive stocks also have come back in vogue at the beginning of 2025. The S&P 500's consumer-staples sector XX:SP500.30 has soared 8.3% so far this year, with its relative strength against the consumer-discretionary sector on Monday reaching its highest level since Election Day in November, according to Dow Jones Market Data. That outperformance suggests "a defensive posture" is underway and could be "a concern for the broader market," Krinsky said in a Sunday client note.

Tumbling over 6% so far this year, the S&P 500's consumer-discretionary sector XX:SP500.25 has been the worst performer among the large-cap index's 11 sectors, according to FactSet data.

Consumer-staples companies are often contrasted with consumer-discretionary firms, which provide nonessential goods and services. Shares of staples companies - which cover essentials that consumers would purchase and use regardless of the state of the economy - are thus identified as defensive and may help to hedge portfolio risk, while discretionary stocks are cyclical since consumers tend to spend less during an economic slowdown or a recession.

Investors have wondered if it is time to adopt a defensive stance. Just days ago, it seemed like the stock market could do no wrong, with the S&P 500 hitting a fresh record of 6,144.15 last Wednesday. But signs of trouble have emerged beneath the surface.

Worries about an unwelcome mix of inflation and stagnating economic growth have been back on center stage after February's economic data on Friday showed the U.S. services sector contracted for the month, while the widely followed University of Michigan consumer-sentiment index also came in weaker than expected.

Meanwhile, uncertainty around President Donald Trump's tariff policies toward major U.S. trading partners has also left markets on unstable footing. The president said on Monday that tariffs on Canada and Mexico will take effect next week, when a 30-day pause on imposing the duties concludes.

"On the one hand, you have the potential for inflation, and on the other hand, it's somewhat signaling that the economy could be softening ... so those types of [defensive] stocks tend to do well in recessionary or bear-market environments," said Gregg Abella, chief executive officer at Investment Partners Asset Management.

"It's just good to have broad diversification for years like this one, where you might see the return that you get from some of these names that have been laggards but tend to do well when it calls for a more defensive posture," Abella told MarketWatch in a phone interview.

See: Trump's tariffs unleashed a wave of uncertainty among investors. Why that's a good thing.

But it might be more than that. Other market analysts think defensive stocks could offer more than just portfolio protection during times of increased market uncertainty.

Michael Rosen, managing partner and chief investment officer at Angeles Investments, said investors might be just picking up stocks with solid earnings and rotating out of higher-valuation sectors into cheaper ones. Also, these stocks "may have less sensitivity to tariffs, which is a pretty, pretty big macro threat to the market," Rosen told MarketWatch via phone.

"Consumer staples, healthcare and utilities are the sectors to be in to have less international exposure, and they are going to be more insulated from a potential trade war, so [the outperformance of defensive names] is just part better earnings, part defensive play, and part ... protection in case Trump actually does what he says with tariffs and reignites inflation and initiates a major trade war," said Eric Sterner, chief investment officer at Apollon Wealth Management.

Opinion: The 'Magnificent Seven' are out; these stocks are in - but there's one catch

Now, the question for investors is whether the strength in defensive stocks could foreshadow broader market weakness for the rest of 2025.

"We could have a relatively good year for [defensive] stocks, but to have the S&P 500 to be up for the year, it is going to be a tougher road to hoe because of the weightings in the index," Abella said.

The healthcare sector makes up around 10% of the S&P 500, while consumer staples and utilities XX:SP500.55 sectors account for 5.5% and 2.3% of the benchmark index, respectively. In contrast, the information-technology sector holds a significantly higher weighting of 30.7%, according to S&P Dow Jones Indices.

The S&P 500's information-technology sector XX:SP500.45 has tumbled 3.3% so far this year, making it the second-worst performer on the large-cap index, according to FactSet data.

U.S. stocks were mostly lower on Tuesday as traders weighed concerns around Trump's tariff plans. The Nasdaq Composite COMP was tumbling 1.8%, while the S&P 500 was off 0.9% and the Dow Jones Industrial Average DJIA was rising 0.1%, according to FactSet.

-Isabel Wang

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February 25, 2025 13:12 ET (18:12 GMT)

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