Defensive Plays in a Downturn: How Shifting Sentiment is Reshaping Investor Strategy

The University of Michigan’s latest Consumer Sentiment Index for May 2025 paints a stark picture: confidence has plummeted to its second-lowest level on record, with households now anticipating nearly 7.3% inflation over the next year—the highest since 1981. This deepening pessimism, driven by trade policy uncertainty and labor market anxiety, is reshaping consumer behavior and investor priorities. For retail and tech sectors, the stakes are high: discretionary spending is contracting, while defensive assets are emerging as critical hedges. Here’s how to position portfolios for this new reality.

The Sentiment Tsunami: Retail’s Darkest Hour

The data is unequivocal: consumers are pulling back. The University of Michigan’s May survey shows year-ahead inflation expectations soaring to 7.3%, with nearly 75% of respondents citing tariffs as a primary concern. This anxiety is translating into spending shifts. Discretionary retail stocks like Target (TGT) and Walmart (WMT) have underperformed the S&P 500 by 12% and 8%, respectively, year-to-date, as households prioritize essentials over luxury goods.

The disconnect between sentiment and sales data is narrowing. While April retail sales edged up 0.4%, this growth was concentrated in groceries and healthcare products, not discretionary categories like electronics or apparel. The National Retail Federation now forecasts 2025 holiday sales growth of just 2.5%, down from a pre-pandemic average of 4.5%. For investors, this means favoring defensive retail plays—such as Dollar General (DG) or CVS Health (CVS)—that cater to price-sensitive, essential-driven demand.

Tech’s Divide: Growth vs. Dividends

The tech sector is far from immune. High-flying growth stocks like Amazon (AMZN) and Netflix (NFLX)—reliant on consumer discretionary spending—are vulnerable. Amazon’s stock has dropped 18% since January 2025 as inflation fears curb spending on non-essentials. Meanwhile, dividend-focused tech firms like Microsoft (MSFT) and Intel (INTC)—with stable cash flows tied to enterprise software and semiconductors—are outperforming.

The Federal Reserve’s recent dot plot hints at a pause in rate hikes, but Chair Powell has warned that elevated inflation expectations could delay easing. This creates a dilemma: while tech’s high valuations are risky in a slowdown, sectors like cloud infrastructure and cybersecurity remain recession-resistant. Investors should focus on dividend-paying tech stalwarts with low debt and exposure to enterprise spending, which tends to hold up better than consumer discretionary tech.

The Defensive Toolkit: ETFs and Contrarian Bets

For broad diversification, consider XLU (Utilities Select Sector SPDR Fund) or VHT (Health Care Select Sector SPDR Fund). Utilities have a 12-month average dividend yield of 3.2%, while healthcare stocks like Johnson & Johnson (JNJ) and Amgen (AMGN) offer stability in a high-inflation environment.

For contrarians, the current pessimism may present opportunities in undervalued tech. Take Texas Instruments (TXN): its stock has dropped 15% YTD despite robust demand for industrial semiconductors. Similarly, Dell Technologies (DELL), with its enterprise hardware and services, trades at 10x forward earnings—a discount to its 12x five-year average.

The Bottom Line: Act Now Before the Tide Turns

The writing is on the wall: consumer sentiment is at a crisis point, and the Fed’s hands are tied by inflation fears. Retail’s discretionary segment is in decline, while tech’s growth stocks face headwinds. Investors must pivot to defensive equity ETFs, dividend-rich tech firms, and recession-resistant sectors like healthcare and utilities.

The final May data on May 30 will test whether the U.S.-China tariff pause alleviates pessimism—or accelerates it. Until then, portfolios should be anchored in stability. As the University of Michigan’s data underscores, the next six months will reward those who act decisively to defend against uncertainty.

Action Items for Now:
1. Reduce exposure to discretionary retail (e.g., TGT, WMT).
2. Shift toward defensive retail plays (DG, CVS).
3. Favor dividend-paying tech (MSFT, INTC).
4. Deploy 10–15% of equity allocations to XLU/VHT.

The storm clouds are here. Position defensively—and profit from the panic.