Stock market turns cautious as ‘defensive’ stocks rise

Some of the hottest stocks in the US point to an economic slowdown.

Utilities and healthcare are among the best-performing groups in the S&P 500 so far this quarter, with gains of 7.8% and 6.6%, respectively, compared to a 4.9% rise in the broad stock index. Big winners include utility company NextEra Energy Inc., which is up 14% this quarter, while shares of medical company Danaher Corp. have increased by 19%.

The gains are notable because investors typically move into such stocks when they expect the outlook to darken. Visits to the doctor and electricity consumption decrease less quickly than spending on vacations or new furniture. Goldman Sachs lowered its forecast for U.S. economic growth for the third quarter from 9% to 5.5% this month, citing the slowdown in consumer spending in the face of renewed Covid-19 outbreaks.

A decline in economic growth from the pace of mid-2021 hardly predicts a recession, the development that often heralds the end of equity boom. But rallies in these so-called defensive sectors could herald a broader market pullback, investors say, potentially posing another test for a market whose post-pandemic rise has surprised many stock market bulls.

“When those sectors are doing well, as they are doing now, you know the market is bracing for either a slowdown in the economy or some sort of correction in the broad market,” said Phil Orlando, chief equity market strategist at asset manager Federated. Hermes.