Why Are Defensive Sectors Outperforming SPY?

In 2025, the broad market benchmark SPDR S&P 500 ETF Trust (SPY) has underperformed traditional defensive sectors—healthcare, consumer staples and utilities—as investors seek stability amid fears of a prolonged tariff war, slowing growth and declining consumer sentiment.

Key defensive sectors, as measured by the Health Care Select Sector SPDR ETF (XLV), the Consumer Staples Select Sector SPDR ETF (XLP), and the Utilities Select Sector SPDR ETF (XLU), are gaining as investors rotate away from high-risk cyclical sectors like technology and consumer discretionary, and into areas known for their steady earnings and resilience during downturns.

XLV, featuring healthcare giants like Eli Lilly and Company (LLY) and Johnson & Johnson (JNJ), has been buoyed by strong healthcare spending and its defensive nature. XLP, which holds consumer staples stocks like Costco Wholesale Corp. (COST) and Procter & Gamble (PG), has benefited from consistent demand for essential goods despite weaker consumer spending. 

Meanwhile, XLU, known for its high dividends and regulated revenue streams, has gained traction as interest rates decline, making yield-focused investments like utilities stocks more attractive.

SPY’s year-to-date return is -1.6% while XLV, XLP, and XLU are up 7.7%, 4.4%, and 3.1%, respectively.

Defensive Sectors Outperform Tech, Consumer Discretionary

Data as of March 4, 2025.

Technology, Consumer Discretionary Sectors Lag

Leading sectors in 2024—technology and consumer discretionary—have stumbled in 2025 as they logged one-month declines of -7% and -7.2%, respectively, as measured by the Vanguard Information Technology ETF (VGT) and the Consumer Discretionary Select Sector SPDR ETF (XLY). 

The tech and consumer discretionary (also known as consumer cyclicals) sectors combine to make up 40% of the S&P 500 index. Furthermore, the so-called Magnificent 7 like Nvidia Corp. (NVDA) and Tesla Inc. (TSLA) come from those two sectors, drive S&P 500 performance, and have put in -13.6% and -32% returns, respectively, in 2025. 

Why Are Defensive Sectors Outperforming SPY?

Over the past month, prices for healthcare, consumer staples, and utilities stocks have gained while technology and consumer discretionary stocks have fallen, dragging the broader S&P 500 index down with them. This may signal that investors are rotating sectors or cutting exposure to risk areas while adding to defensive areas.

Investors seeking lower volatility and consistent returns are increasingly looking to ETFs like XLV, XLP, and XLU as safe-haven plays in a challenging market environment. 

The recent shift in investor sentiment may be short-lived, but it’s possible that investors are beginning to anticipate a prolonged economic slowdown in the 2025, as lingering inflation and fears of a prolonged tariff war weigh on consumers, which would continue to favor defensive sectors like healthcare, consumer staples, and utilities over cyclical sectors like tech and consumer discretionary. 

What Is Sector Rotation?

Sector rotation refers to the cyclical movement of investment capital between different industry sectors of the stock market, as the economy and stock market move through cycles, with periods of expansion, peak, contraction, and trough. 

Different industries perform better at various stages of this economic cycle. For example, financials tend to do well during economic expansions, while consumer staples, also called consumer non-cyclicals, hold up better during recessions. 

Investors practicing sector rotation attempt to anticipate economic phases and shift their investments towards sectors poised to outperform in the coming period. By analyzing past economic cycles and the historical performance of different sectors during those cycles, investors may identify patterns. 

Bottom Line on Sector Rotation

Sector rotation can be a valuable tool for investors seeking to capitalize on cyclical trends in the market. However, its limitations as a leading indicator and the difficulty of precise market timing need to be considered.  

Trying to time the market perfectly (entering and exiting sectors at the exact best moments) is notoriously difficult and can lead to missed opportunities or poor decisions. Sector performance can be driven by factors beyond the economic cycle as industry-specific regulations, technological advancements, or global events can significantly impact a sector's performance. 

Some investment professionals view sector rotation more as a portfolio diversification strategy rather than a strict market timing tool. By allocating capital across various sectors with different risk-reward profiles, investors can potentially improve the overall risk-adjusted return of their portfolio. 

Investors should use sector rotation with other investment strategies and conduct thorough research before making investment decisions.