Teresa Rivas

Artificial intelligence is undeniably more exciting than toothpaste. Yet investors shouldn't entirely forego staples amid the tech-fueled rally.

Of course, they may understandably be tempted to, given the group's performance. The Consumer Staples Select Sector SPDR exchange-traded fund, or XLP, has climbed less than 5% so far in 2025, and about 6% over the past year. The S&P 500's returns have been leaps and bounds ahead of that, and the Nasdaq Composite's gains even better. XLP's showing looks even more gloomy considering that Walmart and Costco Wholesale, which have done fairly well in recent years, are the top two positions. Its third-largest holding, Procter & Gamble, is in the red year to date, and for the past 12 months.

At a time when investors can't seem to get enough risk-exposure, there's little appetite for stodgy staples -- after all, even utilities look less ho-hum given data centers' increasing appetite for power. The Invesco S&P 500 Low Volatility ETF is up less than 5% this year, and up 8% in the past 12 months; contrast that with the Invesco S&P 500 High Beta ETF, which is up double digits over both those periods, and recently hit a new 52-week high.

It doesn't help that inflation, coupled with the overwhelming majority of Americans' plans to eat healthier, has hurt sales of many packaged foods and drinks. Shares of many companies, such as Oreo owner Mondelez International and P&G have drifted lower after earnings this season. In fact, while earnings have been on the rise for many S&P 500 companies, staples management teams' commentary in recent quarters has been cautious.

All of that goes a long way to explain why investors might be skeptical about staples as a whole. However there's also a case to be made for at least hedging some bets with staples, says 22V Research's chief market strategist Dennis DeBusschere, even if near-term headwinds remain.

Earnings per share growth for the group stands at just 3.8%, the second-lowest sector after energy. That said, he notes that staples are particularly susceptible to macro factors, so "if the outlook for financial conditions changes (tighter) or 10-year yields move lower, Staples would likely outperform. Despite weak earnings growth and earnings sentiment."

To that end, DeBusschere notes that the Federal Reserve could also be a catalyst for defensive stocks. If the central bank is slow to react to a weakening economy, holding steady even as data deteriorate, defensives could get a boost at the expense of recent winners.

There's the hope that longer term a "shift in earnings sentiment or re-tightening of financial conditions could eventually revive interest in the low-volatility trade, helping staples," he concludes.

Elsewhere, there are individual winners in the sector, even beyond retailers. Shares of Coca-Cola are up 11% so far this year, outperforming the S&P 500. Ditto for tobacco stocks Altria Group and Philip Morris International, which are doing even better in both 2025 and the past 12 months.

Short another market swoon or recession, it's hard to see staples outshining risky tech favorites. Still, in a year full of surprises like 2025, it doesn't hurt to have a little safety net.

Write to Teresa Rivas at teresa.rivas@barrons.com

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July 30, 2025 13:51 ET (17:51 GMT)

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