By Jacob Sonenshine

Playing defense has been a sure way to underperform in a stock market that only seems to reward offense. That may be about to change.

It feels like defensive stocks -- think consumer staples, real estate investment trusts, dividend payers, and other steady sectors -- should be doing well right now. Job growth slowed down in recent months, and the dearth of data because of the government shutdown means it's difficult to know what is happening in the U.S. economy. Toss in concerns about trade, a sluggish manufacturing sector, and worries about an artificial-intelligence bubble, and safety seems like it should be in style.

That couldn't be farther from reality. The Consumer Staples Select Sector SPDR exchange-traded fund, home to the likes of Walmart, Coca-Cola, and Procter & Gamble, has returned 1.7% this year, including reinvested dividends, badly underperforming the S&P 500's 18% gain. The Health Care Select Sector SPDR ETF has returned just 7.1%, while the Real Estate Select Sector SPDR ETF is up only 5.1%.

This underperformance could attract buyers soon. The ratio of stock prices for a basket of defensive names versus prices for a basket of economically sensitive ones is near its lowest since at least 2013, according to Evercore ISI strategist Julian Emanuel, which seems odd given that the Institute for Supply Management's manufacturing remains below 50, a level that suggests the industrial economy remains sluggish. It's the kind of environment that should favor defense. The AI boom has ensured it hasn't, yet defensives should eventually see a catch-up trade.

Defensive stocks also look reasonably valued, especially compared with the overall market. The staples ETF trades at 19 times 12-month forward earnings, below its five-year average of 19.9 times. It's also more than four points below the S&P 500's 23 times and trading at nearly a 18.5% discount to the index; it has typically traded at a discount of less than 1% over the past five years. Real estate, at 18 times, and healthcare, at 17.6 times, also look relatively inexpensive.

Early signs of the catch-up trade have already emerged. Flows into defensive equity funds in developed markets in the week ended Oct. 24 hit their highest levels since April, when President Donald Trump's initial tariff announcement caused the market to fret over the economy.

This could foreshadow better days to come for defensive stocks.

Coca-Cola looks especially interesting. It's trading at just under 21 times earnings, even though it has often traded in line with or above the S&P 500 in the past five years. The company beat both sales and earnings estimates in the third quarter, with revenue growing 5% to $12.4 billion and adjusted earnings per share growing 6.5%. That included 1% growth in volumes, as its products remain in stable demand, partly because it has little exposure to the weakening snack demand that PepsiCo is confronting.

The stock gained 4% the trading day after reporting earnings by doing what a staple is supposed to do -- post predictable and moderately growing sales and earnings.

Sometimes, defense is the best offense.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 29, 2025 13:23 ET (17:23 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.