Defensive Playbook: Why Staples Outlast Discretionary in 2025 Trade War Crosshairs

The U.S. economy's first-quarter stumble—a 0.3% GDP contraction—has laid bare the fragility of sectors tied to discretionary spending, while consumer staples firms are proving their mettle in turbulent times. With trade wars reshaping supply chains and inflation eroding purchasing power, investors must pivot to defensive strategies. The data is clear: staples like Coca-Cola (KO) and Procter & Gamble (PG) are outperforming discretionary peers like Starbucks (SBUX) and Tesla (TSLA) as policy uncertainty looms. This article outlines why now is the time to overweight staples and underweight discretionary stocks until clarity emerges.

The Economic Crossroads: Staples Defend, Discretionary Struggle

The Q1 GDP decline was driven by soaring imports (+41.3%) as businesses stockpiled goods ahead of tariffs, while federal spending plunged 5.1%. Yet, core PCE inflation—the Fed's preferred gauge—remains elevated at 3.0%, pinching consumer wallets. This trifecta—trade friction, fiscal uncertainty, and inflation—creates a perfect storm for discretionary firms reliant on discretionary income.

Consumer Staples: Anchors in the Storm
Staples firms benefit from inelastic demand. Coca-Cola's Q1 results exemplify this resilience: organic revenue grew 6% despite currency headwinds, driven by price hikes (+5%) and global volume gains. Even in markets like China and India, where growth is strong, KO's unit case sales rose 2%. PG's core EPS rose 5% to $1.93, buoyed by productivity savings and pricing power in essentials like fabric care and health products. Both companies are insulated from trade wars due to localized supply chains and low-income consumer stickiness.

Discretionary: Vulnerable to Policy and Sentiment
Starbucks' Q1 performance tells a starkly different story. Global comparable store sales fell 4%, with U.S. transactions dropping 8% as customers balk at higher prices and operational bottlenecks. Tesla's woes are even more acute: EPS plummeted 40% as tariffs on Mexican and Chinese components inflated costs, while Musk's political gambits spooked investors. Discretionary companies lack the pricing power and demand stability of staples, making them prime candidates for underweighting until trade policies stabilize.

Why Staples Outperform in Trade-War Economies

1. Supply Chain Stability: Staples firms like PG and KO maintain diversified manufacturing networks. PG's restructuring in Argentina, though costly, underscores its ability to adapt to geopolitical risks.
2. Inflation Hedges: Staples companies can pass cost increases to consumers without losing market share. PG's 2% organic sales growth despite a 2% sales decline highlights this pricing discipline.
3. Lower Income Sensitivity: Lower-income households prioritize staples over discretionary luxuries. Credit card delinquency rates at 11.4% among this group signal that Starbucks' $6 lattes and Tesla's $46,000 Model Y are first to get cut.

Actionable Recommendations: Rotate to Staples, Avoid Discretionary Until Q2

Overweight KO and PG:
- Coca-Cola: Maintain a 5-6% organic revenue target for 2025, with free cash flow guiding buybacks. Its dividend yield of 2.8% offers a cushion against volatility.
- Procter & Gamble: Core EPS growth of 5-7% is achievable if commodity costs stabilize. Its 60-year dividend growth streak and $6.5B buyback plan signal confidence.

Underweight SBUX and TSLA Until Policy Clarity:
- Starbucks: Margin contraction (now 11.9%) and transaction declines suggest further downside unless its “Back to Starbucks” strategy reverses traffic trends. Avoid until same-store sales stabilize.
- Tesla: The 44% YTD stock decline reflects investor skepticism about Musk's ability to navigate tariffs and competition. Wait for clearer visibility on Q2 deliveries and margin recovery.

The Bottom Line: Defensiveness Wins in 2025

The trade war and inflationary backdrop are here to stay, favoring companies that dominate essential spending. Staples firms like KO and PG are positioned to outperform as consumers prioritize basics over discretionary upgrades. Investors ignoring this sector divergence risk missing out on the next leg of the rally—or worse, getting crushed by a discretionary sell-off. Rotate now, or risk being left behind.

Final Call: Overweight KO and PG; Underweight SBUX and TSLA until trade policies settle in Q2. The defensive playbook isn't just prudent—it's profitable.