By Jacob Sonenshine
Investors have plenty of reason to move into defensive stocks. The best way to do it: Sell consumer staples and buy healthcare.
For starters, the broader market is looking a little shaky. The S&P 500 has gone nowhere for about four months.
Software stocks have fallen off a cliff on the back of competitive threats from the major artificial-intelligence innovators. The market will sort thought which software vendors can stand strong and which will fall, leaving the sector somewhat of a land mine.
Meanwhile, semiconductor stocks have rallied, but they are giving back a bit of the gain Thursday, even after Nvidia's stellar guidance, indicating that chip stocks have already priced in much of their expected growth. All in all, there are plenty of potential pressure points on the S&P 500.
That's why adding less-volatile stocks to one's portfolio makes sense. The consumer staples, healthcare, and utilities sectors have consistent sales and earnings because aggregate demand for items such as toiletries, groceries, drugs, medical devices, health insurance, and electricity tends to remain relatively stable, no matter what's happening in the economy.
Buying exposure to those sectors today is less straightforward. The best strategy is to sell staples and use the proceeds to rotate into healthcare.
The Vanguard Consumer Staples Index exchange-traded fund has ripped higher -- and looks unattractive. It is up 16% from a multi-month low in early January after having badly underperformed the S&P for years. It was time for staples to enjoy a catch-up trade, so in the past few weeks many market strategists have noted that the group looks overbought. The chart of the past few weeks traces a straight line upward, which means that many investors who wanted more exposure to the sector have already bought in. Going forward, demand for these shares should fade.
Fading these hot stocks now makes sense because they're more expensive in the face of weakening fundamentals. Only about 29% of analysts' revisions of 2026 earnings estimates for staples have been upward, according to FactSet, while a little more than half of 2026 revisions for all S&P 500 companies have been upward. Many staples face the possibility of declining business in the long term. Companies such as PepsiCo, Kraft-Heinz, Utz Brands, Mondelez, Hershey, General Mills, Campbell's, Conagra Brands, and J.M. Smucker are facing headwinds from healthier food options. Staples just might not deserve their current valuations.
Healthcare is a better bet. Companies in the sector don't appear vulnerable to AI or any other kind of disruption. The analyst community seems calm. About 63% of all 2026 earnings revisions for the sector have been upward.
Analysts expect growth. Medical-device makers are expected to grow sales for the long term, as demand for certain types of surgeries rises. Drugmakers are seeing a growth tailwind from GLP-1 weight-loss drugs. Health insurance recently endured a disappointing announcement from the Centers for Medicare & Medicaid Services on funding for insurers, but the stocks look like they have already reflected that setback. Already, UnitedHealth Group, which bottomed this year at $268, has stabilized and is now at $287.
UnitedHealth is an important stock in the healthcare sector, with its $261 billion market capitalization representing almost 5% of the S&P 500 Health Care Sector index's total market cap. Further gains in UnitedHealth, which plans to replace certain costs with AI to increase its profit margins and earnings, would support gains in the State Street Health Care Select Sector SPDR ETF.
Analysts expect about 6% aggregate annual sales growth for the fund, according to FactSet. That, combined with higher margins, should drive 10% earnings growth annually.
That prospect for growth makes its valuation look tolerable. The fund trades at 20.5 times expected earnings for the coming 12 months, just under the S&P 500's 21.9 times. That's not the cheapest it's ever been, but it's normal. It often trades somewhere between a few points below the index and a few points above it. As long as earnings grow close to expectations, the stocks can rise over the next few years.
This little tweak -- selling staples and buying healthcare -- could do wonders for one's portfolio if the market heads south.
Write to Jacob Sonenshine at jacob.sonenshine@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
February 26, 2026 14:49 ET (19:49 GMT)
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