Understanding Defensive Equities: Which Stock Categories Weather Economic Downturns Best?

As recession concerns intensify across the US economy, major financial institutions have significantly raised their economic warning flags. Goldman Sachs and JPMorgan have both escalated their recession probability assessments in recent months, with estimates now clustering between 40% and 60% for a potential downturn in 2025. This shift reflects mounting pressures from trade tensions and potential tariff implementations that could dampen growth and trigger inflationary pressures.

The Current Economic Risk Landscape

Wall Street’s recession probability trajectory tells a compelling story. Goldman Sachs elevated its one-year recession-risk forecast to 45% in early April, a substantial jump from its 20% reading in late March. JPMorgan moved even more aggressively, pushing its 2025 recession odds to 60%, up from 40% in early March. The investment bank maintained this elevated assessment into mid-April, noting that while a 90-day pause on reciprocal tariffs provides some relief, the universal 10% tariff and 145% China-specific tariff remain significant growth headwinds.

These probability levels suggest that prudent portfolio positioning warrants serious consideration.

Identifying Stock Categories That Typically Outperform During Economic Stress

Historical market behavior during downturns reveals consistent patterns in which equity categories tend to preserve capital or generate gains. The most reliable performers generally fall into several distinct categories:

Essential Consumer Goods Providers: Companies producing necessities—food, beverages, personal hygiene products, and household essentials—maintain relatively stable revenue streams regardless of economic conditions. Consumers don’t eliminate these purchases during challenging periods; they simply become more selective about pricing and quality.

Utility Operators: Water, electricity, and gas providers demonstrate remarkable resilience during recessions. Their regulated business models and essential nature create predictable cash flows that support dividend payments even as broader market valuations compress.

Healthcare Sector: Pharmaceutical manufacturers and medical device producers serve non-discretionary needs. People continue seeking medical treatment and prescription medications regardless of economic circumstances.

Discount and Value Retailers: When consumer confidence weakens, price-conscious shopping intensifies. Retailers emphasizing affordability typically capture share from premium competitors.

Precious Metals Mining: Gold and silver miners benefit from two countervailing factors—safe-haven demand increases during recessions while currency devaluation risk rises, and precious metals serve as hedges against both inflation and currency weakness.

“Affordable Indulgence” Stocks: A less obvious but historically validated category includes companies offering inexpensive treats and comfort purchases. During downturns, consumers defer major expenditures on homes and vehicles but often maintain—or even increase—spending on modest pleasures like streaming entertainment, chocolate, fast-casual dining, and entertainment options. These modest expenditures serve as psychological rewards for extended consumption restraint on larger purchases.

Historical Evidence: Performance During the Great Recession

The Great Recession (December 2007–May 2009) provides the most severe modern test case for recession-resistant investing. Over this 18-month period, the S&P 500 index, including dividends, plummeted 35.6%.

However, certain equities demonstrated remarkable fortitude during this extended downturn:

Stocks That Actually Advanced During the Great Recession:

Netflix (NASDAQ: NFLX), the video-streaming leader, gained 33,280% from the downturn’s start through April 2025—a return that included a +23.6% gain during the recession itself. The iShares Gold Trust ETF, tracking precious metals prices, gained 24.3% during the downturn. More modest but still impressive performers included J&J Snack Foods (+18.1%), Walmart (+7.3%), and McDonald’s (+4.7%).

Stocks That Declined But Vastly Outperformed the Broader Market:

Newmont (the world’s largest gold mining company) declined only 0.3%, easily avoiding the market’s 35.6% collapse. Hershey fell 7.2% compared to the index’s 35.6% decline—a margin of 28.4 percentage points of outperformance. Church & Dwight (Arm & Hammer baking soda producer) declined 9.6% versus the index’s 35.6%, representing 26 percentage points of relative strength. American Water Works fell 12.7% while still vastly outperforming, and NextEra Energy declined 15.7%—all dramatic outperformance margins against the broader market’s catastrophic decline.

Since the Great Recession’s start, these stocks have delivered substantial returns: American Water Works has returned 953%, Hershey 524%, NextEra Energy 531%, and Church & Dwight 792%.

Critical Insights from Historical Patterns

Gold Mining’s Dual Nature: Precious metals mining stocks and gold ETFs deliver valuable recession protection but rarely flourish during extended bull markets. Their highly cyclical nature and volatility make them suitable primarily for tactical positioning rather than core long-term holdings. Long-term investors typically experience underperformance because these holdings stagnate during multi-year expansion periods.

The “Affordable Indulgence” Thesis Validated: Netflix and Hershey exemplify stocks leveraging consumer psychology during downturns. Additionally, Netflix enjoys a structural advantage regarding US tariff exposure—as a services company, it faces minimal tariff risk compared to goods-importing competitors. This distinction matters considerably in the current trade environment.

Utility Stock Outperformance Surprises Conventional Wisdom: American Water Works and NextEra Energy demonstrate that utility stocks can meaningfully outperform the broader market over extended periods. This contradicts the persistent “widow and orphan stock” characterization utilities receive in financial discourse. As reference point: Alphabet (Google) has returned approximately 1,090% since American Water Works’ April 2008 IPO, compared to American Water Works’ 953%—a gap smaller than many assume for such a prominent technology company.

Overlooked Stocks Deserve Attention: Church & Dwight represents a category of excellent performers that receive minimal financial media coverage. Investors should resist conflating press coverage frequency with investment quality, particularly for long-term holdings. Substantial outperformance can emerge in decidedly unglamorous sectors.

Navigating Current Portfolio Strategy

The 40-60% recession probability range justifies portfolio review and potential defensive positioning. However, long-term investors should avoid wholesale market exits or elimination of growth-oriented holdings. Market timing proves extraordinarily difficult; selling growth stocks to avoid potential downturns risks missing powerful early-stage bull market rallies, which typically deliver outsized returns during their initial phases.

Historical US equity market direction remains decisively upward over meaningful time horizons. Extended investment timeframes substantially diminish recession-related concerns. Time remains the long-term investor’s most valuable asset, compounding wealth through market cycles regardless of intermediate turbulence.

The optimal approach involves judicious rebalancing toward recession-resistant categories rather than panic-driven portfolio abandonment.