The Market Is Tanking. It’s an Odd Time for Defensive Stocks.

Consumer staples stocks are lagging behind the market, a sign that investors may not be seriously concerned, despite recent losses in market benchmarks. (Charly Triballeau / AFP / Getty Images)

Key Points

• Utilities and healthcare, typically defensive sectors, have seen gains, with the Utilities Select Sector SPDR ETF up over 18% year to date.
• Consumer staples are significantly lagging, with the Consumer Staples Select Sector SPDR Fund down more than 7% from its late August high.
• The performance of defensive sectors suggests investors may not be fully shifting to traditional defensive positioning despite market volatility.

Recent market turmoil led by an artificial-intelligence selloff seems like the perfect opportunity for lagging, less risky areas of the market to shine. Not all seem up to the task.

After going nearly straight up for months, the market has hit a bit of a rough patch, particularly around the AI trade. Skepticism about AI’s real potential returns are mounting, talk of a bubble and potential bust has increased, and investors have been punishing big spenders like Meta Platforms.

That has put pressure on Nvidia’s earnings, scheduled for after the close on Wednesday, to save the day by reassuring investors. Many investors are suddenly feeling quite hesitant to take on risk.

Yet that doesn’t mean that all defensive sectors are behaving as might be expected when sentiment is turning uglier.

In the first place, utilities, normally a group of defensive stocks, have outperformed the S&P 500 year to date. The Utilities Select Sector SPDR exchange-traded fund is up more than 18%, compared with a 12% gain for the index. That reflects a growing appetite for electricity in the U.S., a good portion of which reflects AI data-center demand.

Health care isn’t too far behind either. After lagging in the middle of the year, the Health Care Select Sector SPDR Fund has jumped in recent months, and is now up well over 10% in 2025.

But then there is consumer staples, which is lagging far behind the market. The group hasn’t benefited from recent broader market volatility at all. The Consumer Staples Select Sector SPDR Fund is actually down more than 7% from its late August high.

As Renaissance Macro Research’s Kevin Dempter noted, consumer staples ranks as the worst sector in terms of technical trends. “The divergence in ranks among the defensive sectors suggests we may not have seen a meaningful shift toward traditional defensive positioning yet,” he wrote on Tuesday.

After all, utilities are still benefiting from the AI boost–hence the group’s market-beating performance–while a surge in risky biotech names is behind healthcare’s recent strength. The iShares Biotechnology ETF is up more than 5% in the past month, putting it ahead of the healthcare ETF, while the S&P 500 has fallen some 2% over that same period.

In short, two of the three major defensive sectors are being driven by components that rise when people are still willing to take risks in the market. It is a sign that investors may not be as spooked as they appear.

“A relative breakout in Staples would be a more reliable indicator of a true rotation into defensive sectors,” Dempter wrote. “We will continue to monitor the sector closely, as any relative improvement could help confirm a broader and more durable shift toward a risk off defensive stance in the market. For now, we would remain underweight Staples.”

Piper Sandler’s Craig Johnson noted a similar division, with staples slumping alongside riskier sectors, breaking away from other defensives.

“Sector rotation has shifted toward a more defensive theme lately. Notable underperformance has been seen across our Consumer Cyclical, Staples, Services, and, recently, Technology growth sectors,” he wrote on Tuesday. “Some areas within Financials and Materials have also struggled. Meanwhile, we’ve noticed improvements in Healthcare, Energy, and Utilities that should set up as buy-the-dip opportunities.”

The firm said earlier this week that instead of buying defensive shares, such as the poorly performing consumer staples stocks, bonds are better for worried investors.

All this may be a moot point after Nvidia day on Wednesday. But it is a reminder that just like AI, traditional rules of thumb for investing aren’t infallible.

Write to Teresa Rivas at teresa.rivas@barrons.com