The Looming U.S. Recession: Is Now the Time to Position for Recovery?

The U.S. economy stands at a crossroads. While 2025 GDP growth is projected at 2.4%, the specter of a recession looms large, fueled by weak labor market data, inflationary pressures, and the impending implementation of steep global tariffs. Yet, for contrarian investors, this uncertainty may signal an opportunity to position for recovery. History shows that markets often bottom out in sectors that appear most vulnerable during downturns—only to rebound sharply when macroeconomic conditions stabilize.

The Case for Contrarian Investing

The Schwab Center for Financial Research's “Marketperform” rating for all S&P 500 sectors reflects a cautious stance, but it also highlights where value may be hiding. Sectors like Energy, Utilities, and Materials, which have underperformed in recent months, are now trading at levels that suggest discounted entry points for long-term investors. These sectors are not merely reacting to macroeconomic headwinds—they are being unfairly punished by short-term volatility.

Energy: A Sector Primed for Rebound

Energy stocks have lagged in 2025, with the sector down 7.3% over the past year. However, fundamentals remain robust. High oil prices, strong interest coverage ratios, and the growing demand for energy to power AI infrastructure position Energy as a prime candidate for a post-recession rebound.

The sector's cyclicality works in its favor: as the Fed eases rates, energy demand and commodity prices are likely to stabilize. While risks like oversupply and global demand weakness persist, these are already priced into the sector's valuation. For investors willing to stomach near-term volatility, Energy offers a compelling risk-reward profile.

Utilities: Defensive Strength in a High-Yield Environment

Utilities, with their stable cash flows and high dividend yields, are often overlooked during bull markets but shine in downturns. The sector's resilience is underscored by its role in powering AI-driven industries and its low sensitivity to economic cycles.

Despite its defensive qualities, Utilities has underperformed the S&P 500 by 5.5% over the past year. This discount reflects skepticism about long-term growth, but it ignores the sector's ability to generate consistent returns in a high-interest-rate environment. Utilities' low volatility and steady dividends make it an ideal ballast for a recovery-focused portfolio.

Materials: Undervalued Amid Global Uncertainty

The Materials sector, which includes mining and construction materials, has historically been a barometer for global economic health. While it's vulnerable to commodity price swings and U.S. dollar strength, its 18.9% gain over the past year suggests it's already priced in some of the worst-case scenarios.

A post-recession recovery could see renewed infrastructure spending and industrial activity, driving demand for steel, aluminum, and other raw materials. Investors who position here now may benefit from a re-rating as global supply chains stabilize and tariffs moderate.

Navigating the Risks

Contrarian investing is not without risks. The August 2025 tariff implementation could exacerbate inflation and delay recovery. Similarly, a prolonged labor market slowdown could weigh on consumer-driven sectors like Consumer Discretionary. However, these risks are already baked into current valuations, making them less impactful for long-term investors.

Strategic Entry Points

To capitalize on these opportunities, consider the following:
1. Diversify Across Sectors: Allocate across Energy, Utilities, and Materials to balance cyclical and defensive exposure.
2. Monitor Key Indicators: Track the Fed's rate-cut timeline, consumer spending trends, and tariff developments. A 25-basis-point rate cut in September 2025 could catalyze a sector rotation into value stocks.
3. Use Derivatives for Hedging: Options or inverse ETFs can mitigate downside risk in volatile sectors like Energy.

Conclusion

The U.S. economy may be on the brink of a recession, but history teaches us that recovery begins when pessimism peaks. Sectors like Energy, Utilities, and Materials are undervalued not because their fundamentals have collapsed, but because markets are overreacting to macroeconomic noise. For investors with a long-term horizon, now is the time to position for the rebound. As the old adage goes, “Buy when there's blood in the streets—but don't look at the bodies.”