A marked underperformance

Since the beginning of the year, defensive sectors have underperformed the S&P 500 and MSCI World indices.

For example, the MSCI World Health Care Index has significantly underperformed in recent years, with a return of 1.61% in 2024 compared with 19.19% for the MSCI World in the same year, 4.27% in 2023 compared with 24.42% for the MSCI World, and a negative performance of -0.36% for the global healthcare index in 2025, compared with a positive performance of +5.18% for the MSCI World.

For example, heavy weightings in the MSCI World Health Care index have been suffering greatly since the beginning of 2025: -20% for Merck & Co and Thermo Fisher Scientific, -30% for Novo Nordisk and, above all, -40% for Unitedhealth.

This underperformance of the healthcare sector began in November 2023, at the start of the last bull run of the MSCI World/S&P 500/Nasdaq-100, as shown in the comparative chart below.

Source: Marketscreener.com

This divergence in performance also leads to a divergence in terms of valuation, which can be partly explained by investor enthusiasm for high-growth sectors, particularly technology and artificial intelligence, to the detriment of sectors traditionally perceived as more stable but less dynamic.

Added to this are the difficulties faced by companies in the healthcare sector in terms of margins, particularly since the peak in 2022. The average net margin fell from 11.5% to 8.4%.

Source: Yardeni Research

In the US, the relative discount of these defensive sectors is historic compared to the broad S&P 500 index. You have to go back to 2000 to find a bigger discount.

Source: Topdown Charts

Reasons for the discount

Several factors are contributing to this decline in defensive sectors:

  • Sector rotation: Investors have favored growth stocks in the US, shunning defensive sectors considered less attractive during periods of economic expansion.
  • High valuations elsewhere: Valuations in the technology sectors have reached record levels, making defensive sectors relatively cheaper by comparison.
  • Interest rate expectations: The prospect of high interest rates weighed on rate-sensitive sectors such as utilities.

A possible turnaround on the horizon

Despite this underperformance, several factors suggest a possible reversal in favor of defensive sectors:

  • Attractive valuations: Defensive sectors are currently trading at below-average historical valuations, offering an attractive entry point for investors seeking stability and yield. By way of comparison, the healthcare sector (based on MSCI indices) is trading at 19.93x this year's earnings, the utilities sector is valued at 16.14x earnings, and finally the non-cyclical consumer sector, which is historically more expensive, is currently valued at 22.15x earnings, while the benchmark, the MSCI World, is valued at 22.46 times earnings. So the broad index is more expensive than these defensive sectors.
  • Uncertain macroeconomic environment: Geopolitical tensions, economic uncertainty, and inflation concerns could prompt investors to seek more resilient assets.
  • Stable earnings and dividends: Companies in defensive sectors generally offer predictable income streams and regular dividends, which can be particularly attractive in times of heightened volatility.

The current discount of defensive sectors relative to the S&P 500 reflects a sector rotation in favor of growth stocks. However, attractive valuations, combined with an uncertain macroeconomic environment, could favor a return to favor for these sectors. For investors seeking stability and yield, the healthcare, consumer staples, and utilities sectors deserve renewed attention.