Defensive stocks have traded poorly this year, but this strategist says they are in a sweet spot

U.S. stocks in the underperforming defensive sectors may be due for a comeback in the coming months as fears of an economic slowdown will push Treasury yields lower and increase demand for safe-haven assets in equities, according to Sevens Report Research.

Defensive stocks in the utilities, healthcare and consumer staples sectors were under pressure in the past month as Treasury yields climbed after the U.S. government averted a shutdown and after investors expected the Federal Reserve to keep interest rates higher for longer as the U.S. economy remained strong.

The underperformance of defensive sectors has resulted in some stocks trading at valuations last seen before the pandemic, Essaye said. For example, the utilities sector was trading at a forward price-to-earnings ratio of 14.7, which was the lowest level since 2018. Consumer staples sector, meanwhile, was trading at a P/E ratio of 18. That was also the lowest level since before the pandemic, according to Sevens Report Research.

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