What do you do when your old-school, recession-proof trades aren’t working as intended?
That’s a question investors are grappling with in a stock market constantly being shaken up by news on tariffs and recession concerns.
When the economy goes south, investors usually reach for reliable defensive stocks such as those in the consumer staples, healthcare, and utilities sectors. These companies provide essential goods and services that are always in demand, even when there’s talk of the economy souring.
However, some Wall Street experts are wary of these trades in the current market environment.
Utilities stocks are beating the S&P 500 year-to-date and over the last 12 months. But legendary investor Warren Buffett recently warned at Berkshire Hathaway’s annual shareholder meeting that utility companies, which investors love for their stable revenues, might not be as dependable as they once were going forward.
“Berkshire Hathaway Energy is worth considerably less money than it was two years ago based on societal factors,” Buffett said, citing wildfire risk as a threat to the sector. He warned investors to temper their valuation expectations going forward.
Savita Subramanian, the head of US equity and quantitative strategy at Bank of America, is raising the alarm on another area of the defensive trade: consumer staples.
“What’s interesting is you’re hearing more weakness around consumer and even in consumer staples. So if you think you can hide in the food stocks and the defense, that’s not necessarily working this time,” Subramanian said on an April 29th episode of the “Bloomberg Surveillance” podcast.
Recent earnings reports revealed that consumer staples companies are indeed struggling under tariff-induced market turmoil. Take Kraft Heinz (KHC), for example. The company is one of the largest food and beverage manufacturers in the US and produces not only condiments but also Oscar Meyer hot dogs and Velveeta cheese, among other basic food staples — all seemingly recession-resistant products. Yet, the company lowered its sales outlook from -1.5 to -3.5% in fiscal 2025 on its Q1 earnings report. Similarly, Church & Dwight (CHD), which produces household essentials like laundry detergent and toothpaste, lowered its sales outlook to 0-2% growth (previously 3% to 4%).
This isn’t just the case for a handful of companies. Downward earnings revisions in the consumer staples sector were unusually large and came earlier than expected this year, according to Morgan Stanley consumer staples analysts Dara Mohsenian and Eric Serotta.
The number of quality companies in the staples sector has also been on the decline. Bank of America considers 65.8% of companies in the staples sector high quality, which is 15.9 percentage points lower than the sector’s long-term average.
Go for value and quality
Instead of turning to traditional defensives, Subramanian has her eye on value and quality stocks, which are more likely to be tied to essential spending. Value stocks are those that trade at low prices relative to their fundamentals — in other words, they are cheap or undervalued. Quality stocks, meanwhile, are companies with strong balance sheets, consistent earnings, high returns on equity, and other positive characteristics.
“Russell 1000 Value companies have a much higher non-discretionary spend, either services or goods,” Subramanian said. Seventy-six percent of the revenue in the Russell 1000 Value index comes from nondiscretionary spending, whereas only 56% of the Russell 1000 Growth index does.
Bank of America
“If we’re in an environment where we’re cutting back, we’re still going to pay insurance,” Subramanian added.
Companies in the insurance, industrials, and financial services sectors tend to be more recession-resilient, as spending is often required by law or driven by necessity. Additionally, the industrials and financials industries in the S&P 500 rank at the top of the list for having the highest percentage of high-quality stocks, according to Bank of America.
The Russell 1000 Value index also has a higher percentage of companies paying dividends than the Russell 1000 Growth index. Dividend stocks can be a smart bet during an economic downturn, as they offer consistent cash flows and come from financially stable and mature companies.
Bank of America
For investors looking to buffer their portfolios with more safe-haven trades, consider adding exposure to funds such as the iShares Russell 1000 Value ETF (IWD) and the Vanguard Dividend Appreciation ETF (VIG).