By Ian Salisbury

So far this year stock investors have faced a difficult market, with a slowing economy and tariff worries. The good news: Defensive stocks are still delivering solid returns.

Stock investors had little to complain about in 2024: The s&P 500 delivered its second 20%-plus return in two years. The first three months of 2025 -- the first quarter ends on Monday -- have been a different story. While the S&P 500 hit a new record on Feb. 19, it swiftly dipped into correction territory. Overall, the index has fallen 4.9% this year, its worst start since 2022, according to Dow Jones Markets Data.

Fortunately, not all corners of the market have shared the pain. Of the S&P 500's 11 subsectors, seven have actually delivered positive returns this year, led by energy, up nearly 8%; healthcare, up 5%; and utilities, up about 3%.

Exxon Mobil and Chevron, the market's two largest energy stocks, have risen 9.5% and 15%, respectively, this year. In healthcare, Eli Lilly has gained 6.5% and UnitedHealth Group has risen 2%.

Investors' problem is that after years in which the market became more and more focused on booming Silicon Valley names, these three stalwart sectors now represent less than 10% of the overall market capitalization, while tech (down 14%) and communications (down 6%) make up about 40%.

Still, the defensive strategy that's worked for the first three months of 2025 should continue to deliver in coming months. While consumer confidence has been sliding, the odds of a recession remain relatively low. More likely is that the economy will continue to muddle along, despite uncertainty stemming from the Trump administration's trade war.

"One of our biggest near-term market concerns beyond tariffs is the prospect of a weaker nonfarm payrolls report over the next three months leading investors to conclude that the [Federal Reserve] is behind the curve," wrote Wolfe Research strategist Chris Senyek in a note Friday. "We believe that weaker economic news is bad for stocks (and vice versa). As such, we lean defensive over the near-term" -- which means consumer staples, healthcare, real estate investment trusts and utility stocks, Senyek wrote.

Bank of America also has been steering clients to defensive stocks -- noting that much of the market still looks overpriced. While the S&P 500 is down about 7% from its peak, and 2025 earnings estimates have seen cuts, "net net, the index remains statistically expensive on almost every measure we track," wrote BofA Securities analysts on Friday.

BofA's valuation model, which measures sectors' relative price-to-book and price-to-operating-cash-flow ratios, suggests technology stocks remain dramatically overvalued by both metrics, while energy is the market's most undervalued sector, followed by healthcare and utilities.

Dean Christians, senior research analyst at SentimenTrader also is worried about corporate earnings and, as a result, bullish on defensive names. In a report Thursday, he noted the Citigroup U.S. Earnings Revision Index has fallen for 14 straight weeks, a scenario that underlines the case for defensive stocks.

"Similar streaks preceded an unfavorable outlook for the S&P 500," he wrote. "Cyclical sectors typically suffered, whereas defensive groups outperformed the broad market."

Write to Ian Salisbury at ian.salisbury@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

March 29, 2025 13:11 ET (17:11 GMT)

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