What Are Defensive Stocks? Should You Buy Them Now? Are Defense Stocks Defensive?

TradingKey - As U.S. tech stocks face volatility and decline, capital often rotates into defensive stocks. The appeal of defensive stocks has been evident during crises like the 2008 financial crash, the 2020 pandemic shock, and fears of an economic recession in late 2024.

Defensive stocks are seen as "safe havens" during economic downturns because their products or services maintain stable demand regardless of economic cycles. Warren Buffett’s investment success is largely attributed to his preference for defensive blue-chip stocks.

When market sentiment weakens or concerns about overconcentration arise, reallocating part of a portfolio into defensive assets—with stable dividends and lower volatility—can be a prudent strategy.

Common defensive stocks include consumer staples like Procter & Gamble(PG.US), Nestlé, Coca-Cola, and Walmart; healthcare giants like Pfizer and Johnson & Johnson; and utilities such as NextEra Energy and AT&T(T.US).

Defensive stocks are characterized by their low correlation to economic cycles. They typically provide steady dividends and stable returns during market turbulence or economic uncertainty.

Key Characteristics of Defensive Stocks:

• Stable Demand: Essential goods and services like food, utilities, and healthcare remain in demand regardless of economic conditions.
• Strong Cash Flow: Consistent demand ensures predictable cash flow.
• Resilient Earnings: Stable demand and cash flow support reliable profitability.
• Inflation Resistance: Companies can pass rising costs to consumers due to inelastic demand.
• Consistent Dividends: Healthy finances allow regular payouts. For example, Coca-Cola has raised its dividend for 63 consecutive years as of Q4 2025.
• Low Volatility: These stocks often have beta values <1, underperforming during bull markets but providing downside protection.
• Low Macro Sensitivity: Sales are less tied to economic cycles.
• High Industry Concentration: Dominant players with brand power, scale, or technological barriers.

Defensive stocks are non-cyclical, while cyclical stocks thrive during economic expansions but suffer in downturns.

[Defensive vs. Cyclical Stocks, Source: TradingKey]

Investors should adjust allocations based on economic conditions:

• Defensive Stocks: Ideal during recessions or high volatility but may lag in growth periods.
• Cyclical Stocks: Best during early recovery phases or loose monetary policy for higher returns (with higher risk).

Historical Performance:

• 2008 Crisis: S&P Consumer Staples fell 18% vs. Industrials’ 42% drop.
• 2020 Recovery: Utilities rose 8% vs. Energy’s 53% surge.

1. Utilities (e.g., NextEra Energy, Duke Energy): Stable demand for water, power, and telecom services.
2. Consumer Staples (e.g., Coca-Cola, Walmart): Essential goods with inelastic demand.
3. Healthcare (e.g., Merck, Johnson & Johnson): Steady demand for medical products, though regulatory risks exist.
4. REITs (e.g., Equity Residential): Focus on cash-flow-generating properties.
5. Other Defensive Plays: Telecoms (AT&T, Verizon) and logistics (UPS).

While tech giants like Microsoft and SAP are sometimes labeled "growth-oriented defensives" due to their stable cash flows, traditional tech stocks are generally considered cyclical. Their performance is closely tied to economic cycles, innovation risks, and sentiment.

In late 2024, UBS included Microsoft in its defensive stock list, citing the "economic resilience" of cloud computing.

However, Morgan Stanley maintains that the tech remains pro-cyclical, typically bottoming alongsidethe broader market during bear phases.

Defense stocks (e.g., Lockheed Martin) share some similarities with defensive stocks but also possess distinct traits:

Defensive Traits:

• Government-Backed Demand: Military budgets prioritize security even in recessions.
• High Barriers: Advanced tech and long-term contracts ensure stable orders.

Non-Defensive Risks:

• Geopolitical Sensitivity: Short-term spikes from conflicts, but peace talks may trigger pullbacks.
• Policy Shifts: Changes in defense spending priorities (e.g., Trump’s proposed 8% budget cuts).

Overall, defense stocks are considered "event-driven defensives"—more stable than cyclical stocks, but less predicable than utilities or healthcare.

As of March 2025, several factors favor defensive allocations:

• Market: S&P 500 entered a technical correction; VIX spiked.
• Valuations: Tech’s high P/Es contrast with defensives’ relative cheapness.
• Economy: Trump’s tariffs and Fed’s hawkish pause fuel recession fears.
• Policy: Uncertainty over trade and fiscal policies.

Analyst Views:

• Stifel: Favors healthcare and utilities amid slowing growth.
• UBS: Over 60% likelihood of cyclical underperformance.
• Morgan Stanley: Trump’s policies may shift gains from tech to domestic manufacturing and regulated sectors.

1.Coca-Cola

Coca-Cola (KO.US) is a leading global beverage brand, known for its strong brand recognition, loyal consumer base, proprietary formulas, and diversified business portfolio. It is also one of Warren Buffett’s most heavily invested stock. The beverage industry is characterized by long-term stability, and Coca-Cola accounts for roughly half of the global carbonated beverage market.

KO has exceptional profitability, with a gross profit margin exceeding 60% for over thirty consecutive years. The company also follows a long-term, stable dividend policy, having increased its dividends for more than sixty consecutive years.

As of March 20, 2025, the share price of Coca-Cola has risen 11% year-to-date, while the S&P 500 Index has declined by 3.5% over the same period.

2.Walmart

Walmart (WMT.US) is a retail giant in daily consumer goods and food, benefiting from strong, inelastic demand. Its massive procurement scale and highly efficient supply chain give it a significant cost advantage over competitors. Walmart’s stable operations bring continuous cash flow, and the company is also actively advancing the integration of its online and offline businesses.

As of the fourth quarter of 2025, Walmart has increased its dividends for 52 consecutive years and is projected to achieve a compound annual growth rate of 8% over the next five years. Despite ongoing headwinds facing the U.S. economy, Walmart's earnings per share (EPS) have surpassed market expectations for 11 consecutive quarters.

Walmart has demonstrated strong share price and performance resilience during past economic recessions. During the 2008 financial crisis, while the S&P 500 declined by 37%, Walmart's share price increased by 15%. In 2020, amid the COVID-19 pandemic, the company’s revenue increased by 6.7% and its net profit surged by 45%.

As of March 20, 2025, Walmart's share price has risen 40% over the past year.

3.Johnson & Johnson

The century-old Johnson & Johnson (JNJ.US) is the world’s most comprehensive healthcare enterprise, with operations spanning pharmaceuticals, medical devices, and consumer health. The gross profit margin of the JNJ has remained above 68% for many years, significantly higher than the pharmaceutical industry average of 60%.

As of the fourth quarter of 2025, Johnson & Johnson has increased its dividend for 62 consecutive years. The company’s shares are widely regarded as a safe haven during periods of financial market volatility.

• In 2008, S&P 500 ↓37% v.s. JNJ ↓8%. 
• In 2020, S&P 500 ↓34% v.s. JNJ ↓15%. 
• In 2022, during the interest rate hike cycle, S&P 500 ↓19%, JNJ ↓3%.

Since the beginning of 2025, Johnson & Johnson’s share price has risen nearly 13%, while all members of the "Magnificent Seven" have declined over the same period.

4.Apple

Apple (AAPL.US) is a representative of U.S. technology stocks, but due to its strong brand premium, unique closed system, robust cash flow, consistent dividend growth, and innovation-driven resilience to hedge against cycles, it is also regarded as a defensive blue-chip stock.

Apple is the only technology company favored by Warren Buffett. Over the four fiscal quarters of 2024, it paid out $15.3 billion in dividends, bringing its cumulative total dividend payments to $165 billion.

5.Lockheed Martin

Lockheed Martin (LMT.US) is the largest defense industry contractor in the world. Leveraging a business model dominated by government contracts, its monopolistic position in technology, and demand driven by geopolitics, it has become a benchmark for defensive stocks.

As the largest defense contractor for the U.S. Department of Defense, Lockheed Martin accounted for 28% of the department's procurement expenditure in the fiscal year 2024. As of early 2025, the company has paid dividends for 41 consecutive years.

It is important to noted that under Donald Trump's second-term plan, there is a proposal to cut the defense budget by 8% in the next five years, which could pose a challenge to Lockheed Martin. However, with a large backlog of orders, expanding international business, and increasing military spending in Europe, Lockheed Martin should be well-positioned to maintain its growth momentum.