By Jacob Sonenshine

Tariffs will be an overhang for the stock market, but consumer staples and utility stocks should emerge from a trade war relatively unscathed.

President Donald Trump is threatening tariffs on imported goods from Mexico, Canada, and China. The situation remains fluid, but if companies pass on any increased costs by lifting prices, they could see a hit to demand.

But consumer staples and utility providers may largely be just fine. While the majority of S&P 500 stocks were in the red Monday, the two sectors were narrowly in the green.

Staples, theoretically, have stronger pricing power, unlike other consumer companies such as U.S. travel companies -- those stocks were down because people may pull back on travel spending if prices are higher.

But staples -- think groceries and household items -- could handle price increases with ease. Many of these products are bought out of necessity and are relatively cheap.

Anheuser-Busch InBev SA -- maker of Bud Light, Beck's, and other brands -- saw its stock drop 1%, making it look like more of a buy than anything else. It produces beverages locally in its markets spanning more than eight countries, so it isn't particularly exposed to imports and higher costs. To the extent that it is, it can lift prices fairly easily.

That is especially true if competitor Constellation Brands, down 3.5%, must lift prices more aggressively. Constellation imports much of its beer directly from Mexico.

Other beer makers in a similar position to AB InBev include Molson Coors and Boston Beer Company.

Shares of Procter & Gamble, Keurig Dr Pepper, Coca-Cola, and PepsiCo all outperformed the average stock Monday, with the former two inching into the green. They produce most of their product locally, so they may not see much of a cost problem. They also have plenty of pricing power.

Monster Beverage is in the same category, but it looks particularly enticing. It was down 2.5%, partly because its China sales, which comprise 1% of total revenue according to FactSet, are at risk. Chinese consumers could boycott American products.

But the impact to the company's sales may be so small that it is essentially invisible on an income statement. Also, Monster Beverage stock came into this week already beaten up badly, so now it looks like an enticing value. It is down double digits in the past year, while the S&P 500 has gained more than 20%.

Now, Monster trades at 25.5 times analyst's expected earnings per share for the coming 12 months, a mere 16% premium to the S&P 500's 22 times. Historically, the stock has often traded at a much larger premium, with a high of about 37 times in the past two years. Simply put, if the company continues to show consistent profit growth, the market will go back to feeling comfortable about the company's long-term prospects and bid shares higher.

Utility stocks should hold up well, too. The Utilities Select Sector SPDR ETF closed 0.5% higher Monday. Sales of utility stocks have no sensitivity to broader economic demand since everyone needs power, so the utilities that can increase rates, given what their state regulators allow, will do so.

Plus, their dividends only become more attractive with the tariff news causing bond yields to fall. While short-term treasury yields are slightly higher (additional inflation will prevent the Federal Reserve from cutting short-term interest rates), the 10-year yield is slightly lower because any lowered economic demand would pressure longer-term inflation. That makes utilities' dividend yields slightly more attractive, supporting buying interest in the stocks.

AES Corporation, which serves several states across the country, imports only a small chunk of its solar panel goods from China, so it likely won't experience a large cost problem. Meanwhile, its 6.8% dividend yield is several percentage points above the 4.5% 10-year yield, so as long as the 10-year yield doesn't move up much -- and especially if it drops more -- buyers will support the stock price.

Clearway Energy, which also serves states across the country, is in a similar boat. Its dividend yield is 6.9%.

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

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February 03, 2025 17:11 ET (22:11 GMT)

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