Q1 2025: Defensive Sectors Outperform Amid Rising Volatility
Q1 2025 showed a stark contrast between defensive and cyclical sectors. Consumer Staples, Utilities, and Real Estate withstood the market’s most severe downturn—including a single-day drop in the S&P 500 of nearly 6%—and still managed to post positive year-to-date returns. This resilience illustrates why defensive sectors should be a cornerstone of every investment strategy.
The first quarter of 2025 saw the S&P 500 stumble following a strong rally in late 2024. In Q1, the index delivered a negative return of -4.6%. This period was marked by heightened uncertainty driven by geopolitical risks and escalating trade tensions.
A sector-level comparison reveals a clear divergence between defensive and cyclical sectors. Energy led the performance among defensives, with Healthcare, Consumer Staples, and Utilities also posting gains. On the other hand, growth-heavy sectors—particularly Consumer Discretionary and Technology—underperformed significantly.
Defensive vs. Cyclical: A Widening Gap
This divergence came to a head in early April, when the S&P 500 experienced its most severe downturn of the year. On April 4th, the index fell 5.97% in a single session in response to newly announced U.S. tariffs and retaliatory measures from key trade partners, most notably China. Over a two-day period, the S&P 500 dropped more than 10%, marking its worst two-day stretch since the COVID-19 panic in March 2020.
However, not all sectors were impacted equally. Defensive sectors, led by Consumer Staples and Utilities, followed by Healthcare and Real Estate, ended the period in positive territory on a year-to-date basis—demonstrating notable resilience during a turbulent time.
According to Morgan Stanley’s April 2025 outlook, “Real estate fundamentals continue to improve,” with cap rates stabilizing and new construction slowing significantly. This supply discipline, combined with more attractive valuations, has created “an attractive opportunity set for commercial real estate equity—particularly in secularly growing sectors.”
A Case for Defensive Investing
The relative outperformance of Real Estate amid market volatility suggests that investors are increasingly viewing the sector as a safe haven. As tariff uncertainty intensifies, the focus is shifting toward stable income streams and tangible assets rather than high-growth potential.
One option for investors seeking defensive exposure is the ZDR Investments Master Fund. Built on a defensive strategy, the fund focuses on a European portfolio of grocery-anchored retail parks—benefiting from the stability of both real estate and the Consumer Staples sector. It demonstrated resilience during COVID and other periods of economic stress, proving that it’s wise to maintain a portion of defensive assets in any long-term investment portfolio.
Discover what makes European retail parks such a compelling investment asset, combining stable cash flows, resilient tenant demand, and long-term growth potential in a changing consumer landscape.
