By Jacob Sonenshine

The ideal time to buy consumer staples is when the economy weakens, and the stocks are still cheap -- which is the case right now.

Gross domestic product growth is starting to decelerate after years of expansion. The labor market has weakened over the past several months, and the outlook for GDP growth is weak enough that the Federal Reserve is likely to cut interest rates in September and possibly afterward.

That environment is a good time to move into what are known as defensive stocks, names that see consistent sales and earnings even when the economy weakens. In other words, these stocks aren't as economically sensitive as others. Traditional defensive sectors are utilities, real estate, healthcare -- which Barron's has recommended multiple times over the past few months, partly because of some of the companies' growth outlooks -- and consumer staples.

Those sectors look ready to rally, particularly because they have all already underperformed the S&P 500's 11% gain this year. Economically sensitive sectors, on the other hand, have performed mostly in line with or better than the index.

Buyers will likely swoop in to bid defensive stocks higher when there are negative economic developments. This is already happening. Friday's worrisome jobs report, for example, caused a dip in the S&P 500, but healthcare, consumer staples, and real estate sectors all gained. The utilities sector was an outlier, falling in line with the index that day.

Tom Essaye from Sevens Report, a daily newsletter on markets, says staples, utilities, and healthcare should outperform as they historically do when the economy weakens. Staples look especially attractive because they're cheap right now and should enjoy largely strong fundamentals.

The Vanguard Consumer Staples exchange-traded fund trades at just above 20 times analysts' expected earnings for the coming 12 months, below the S&P 500's 22 times. Staples often trade at a higher multiple than the S&P 500 when the economy is in the later stages of an expansion and is showing signs of a slowdown. That is when investors begin to allocate more money to safer assets like staples.

In 2019, for example, after years of economic growth and as the Fed started cutting rates to support the economy, staples traded at higher multiples than the S&P 500. The same was true in 2007 after an expansion and just before the financial crisis. Investors are likely to rotate into consumer staples as long as the group, broadly speaking, lives up to its steady-eddy reputation.

Walmart and Costco Wholesale, the top two holdings in the Vanguard consumer staples fund, account for about a quarter of the ETF's assets. Those two firms grow earnings most years and have taken market share from other retailers. The third-heaviest weight is Procter & Gamble, which has grown sales and earnings every year since 2017. These companies have the size and scale to mitigate cost pressures from tariffs, too. One way they do that is by raising prices without losing too much demand because of the sway they have with customers.

The fund does hold some struggling companies such as PepsiCo, Hershey, General Mills, Kraft-Heinz (which is splitting up), Estee Lauder, Archer Daniels Midland, and Target. Still, some of those names have just begun to turn things around. Estee Lauder, for example, has seen its stock gain 19% this year. And even if those stocks disappoint going forward, they comprise only a touch more than 10% of the market capitalization of the fund, which means the other almost 90% is in names that have seen healthy performance.

The fund should generate about 8% earnings-per-share growth next year, according to FactSet. That would come on the back of just over 3% sales growth this year. The companies in the fund are expected to see stable net profit margins and to repurchase more shares, which reduces share count and pushes EPS upward.

That growth forecast looks achievable. Demand for the entire sector should remain stable, and analysts have already lowered their 2026 sales and profit projections a bit since February, according to FactSet. Earnings estimates have now stabilized and are up a tick since the end of June, just before the consumer staples sector's overall second-quarter earnings results topped expectations.

Sometimes defense is the best offense.

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

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September 08, 2025 14:25 ET (18:25 GMT)

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