U.S. consumer staples stocks, long viewed as a defensive anchor within equity portfolios, are slipping from the favor they enjoyed earlier this year as investors confront stretched valuations and a softer earnings backdrop. After a period of heavy buying that followed a rotation out of richly priced technology names, the sector's forward price-to-earnings ratio reached levels not seen since June 1999, according to LSEG data. That surge, however, has started to reverse since the index recorded a record high in mid-February.
The S&P 500 consumer staples index has surrendered 5.6% so far in March, a shift that has coincided with renewed momentum in technology and energy stocks following the outbreak of conflict in the Middle East on February 28. Historically, investors have sought refuge in defensive sectors during episodes of geopolitical uncertainty, favoring companies that can deliver steady earnings regardless of the broader economic cycle - a narrative that helped staples earlier in the year.
But analysts now caution that the defensive case for staples may be weakening as market dynamics evolve. "Rising inflation expectations tied to potential escalation with Iran could begin to undermine the defensive appeal of staples, particularly given how strongly the sector has already performed this year," said Neil Wilson, investor strategist at Saxo. In other words, a further pickup in inflation risks could erode consumer spending power and compress profit margins for companies whose revenues are sensitive to household budgets.
Those concerns are reflected in shifting earnings projections. First-quarter earnings for the S&P 500 consumer staples sector are now expected to rise 1.9%, a deceleration from the 6.6% growth forecast at the start of the year, Tajinder Dhillon, head of earnings and equity research at LSEG, said. By contrast, the broader S&P 500 is expected to deliver 12.8% earnings growth in the same quarter, highlighting a widening gap between staples and the wider market in terms of profit momentum.
Pressure on the food segment - a substantial component of the staples index - has already materialized in company-level guidance changes. General Mills, the maker of Cheerios, trimmed its annual core sales and profit forecasts, triggering a selloff among food peers last month. More recently, Campbell's Co. cut its outlook and suspended its share buyback program, citing weak demand for its snack products. Campbell's shares are trading at their lowest levels since March 2003, and the name figures among the weakest performers in the staples group this year.
Against this backdrop, asset managers are taking a selective approach. "We want to be selective in this environment, focused on earnings growth, as further multiple expansion (is) unlikely," said Jake Johnston, deputy CIO of Advisors Asset Management. The implication is that investors should prioritize companies with clear earnings momentum rather than relying on continued valuation uplift across the sector.
Yet not all parts of the staples complex have disappointed. Large retail-oriented staples names, benefiting from the defensive rotation and solid quarterly results, have produced strong absolute returns. Costco Wholesale and Walmart both reported positive quarterly numbers and have seen double-digit share gains so far this year. But those very gains have pushed valuation measures for the two largest stocks in the index to elevated levels. "A consequence of the rally is that the two largest stocks in the index are overvalued," said Mark Preskett, senior portfolio manager at Morningstar Wealth. He noted that Walmart and Costco are trading at more than 40 times forward earnings, representing the highest valuations in the sector.
Preskett added that, while Walmart's recent results were "excellent," the market is clearly paying a premium for perceived earnings resilience. That premium, in his view, raises questions about the sustainability of further multiple expansion for those names.
Despite recent weakness, the sector remains up 10% year-to-date. Some investors argue the defensive premium could return if concerns about artificial intelligence-related disruption to business models re-emerge. "In this period now where we are living through so much AI-related uncertainty, including around its potential impact on which companies survive and broader employment, staples have a benefit in investors' minds because they are not in AI's path of destruction," said Erika Maschmeyer, portfolio manager at Columbia Threadneedle.
Separately, sales and valuation questions have also produced promotional interest in specific tickers. For example, an investment tool referenced in the market discussion asked whether investors should be buying GIS - General Mills' ticker - and highlighted how its AI-driven strategy evaluates thousands of companies on more than 100 financial metrics. The tool described past winners it attributed to its process, citing Super Micro Computer (+185%) and AppLovin (+157%) as examples of notable returns identified by the system.
For investors weighing exposure to staples, the near-term outlook appears to favor a selective, earnings-driven approach. The cohort of food companies facing changing consumer habits and weak demand stands in contrast to retail-oriented staples that have so far justified higher valuations with solid quarterly results. With the potential for inflationary pressures tied to geopolitical risk and an already-high valuation base, market participants are closely watching whether the defensive narrative that supported staples earlier in the year will reassert itself or continue to lose momentum.
Key points:
- The S&P 500 consumer staples index's forward PE reached its highest level since June 1999 before sliding after a mid-February peak.
- First-quarter earnings for the staples sector are now forecast to rise 1.9%, down from a 6.6% expectation at the start of the year; the broader S&P 500 is projected to grow earnings by 12.8%.
- Company-specific weakness - including forecast cuts at General Mills and Campbell's - contrasts with strong results from retail staples like Costco and Walmart, which are trading at more than 40 times forward earnings.
Risks and uncertainties:
- Escalation of geopolitical tensions linked to Iran could raise inflation expectations, undermining staples' defensive appeal and pressuring margins - particularly for food companies sensitive to consumer spending.
- Shifts in consumer behavior, including changing eating habits and weak demand for certain snack categories, may continue to weigh on the earnings trajectory of food-focused names within the sector.
- Elevated valuations for the sector's largest stocks could limit upside from multiple expansion, increasing the importance of earnings growth for future returns.