Stagflation Threats Demand Defensive Shifts: Why Utilities and Staples Are the Safest Plays

The U.S. economy’s first contraction since 2022 has exposed vulnerabilities in consumer spending, with tariff-driven inflation and weakening sentiment pressuring GDP. Investors must pivot to defensive sectors like utilities, healthcare, and consumer staples to shield portfolios from stagflation risks. Here’s why—and how—this shift is urgent.

The U.S. Consumer Slowdown: Data Reveals the Weakness

Recent data paints a stark picture: U.S. real GDP fell 0.3% in Q1 2025, driven by a surge in imports and declining federal spending. While consumer spending grew 1.8%, this marked a sharp slowdown from 4% in Q4 2024. Crucially, the decline was concentrated in discretionary categories.

Bank of America’s card spending metrics reveal the pain points:
- Discretionary services (airline tickets, lodging) saw significant declines as consumers cut back amid rising prices.
- Essential spending (healthcare, housing) remained resilient, but even here, stagnant wage growth for lower-income households has tightened budgets.

Inflation exacerbates this divide. The core PCE price index hit 3.5% in Q1—the highest since 2023—while services prices rose 4.2%. Utilities and healthcare, which often have regulated pricing or inelastic demand, are better positioned to navigate this environment.

Global Stagflation Risks: Singapore’s Caution Signals a Broader Threat

Singapore’s economy grew 3.9% year-on-year in Q1 2025 but contracted 0.6% quarter-on-quarter, raising fears of a technical recession. The Ministry of Trade and Industry has slashed its 2025 growth forecast to 0.0%-2.0%, citing U.S. tariffs and global trade uncertainty.

Why does this matter for U.S. investors?
- Tariff ripple effects: Singapore’s 10% baseline tariff on U.S. imports—and higher rates for other Asian nations—highlight a worsening trade environment. These measures disrupt global supply chains, boosting input costs for U.S. firms.
- Stagflation risks: Singapore’s contraction and inflation pressures underscore how synchronized slowdowns and persistent prices could derail global recovery.

Sector Rotation: Play Defense, Avoid the Fragile

The data demands a strategic shift:

Favor Defensive Plays

1. Utilities:
2. Regulated pricing and stable demand make this sector a hedge against inflation.

3. Companies like NextEra Energy (NEE) and Dominion Energy (D) offer dividends and insulation from economic cycles.

4. Healthcare:

5. Healthcare spending grew 2.4% in Q1, outpacing overall consumer spending.

6. Defensive picks include Johnson & Johnson (JNJ) and UnitedHealth Group (UNH), which benefit from aging populations and inelastic demand.

7. Consumer Staples:

8. Procter & Gamble (PG) and Coca-Cola (KO) dominate essential goods, offering steady earnings amid inflation.

Avoid Discretionary Vulnerabilities

• Retail: Weak wage growth and debt-driven households are squeezing margins. Avoid big-box retailers like Walmart (WMT) and Target (TGT).
• Automobiles: Durable goods spending fell 3.4%, with tariffs and high costs damping demand. Tesla (TSLA) and Ford (F) face near-term headwinds.

The Bottom Line: Act Now to Avoid the Pain

The writing is on the wall: stagflation risks are mounting. U.S. consumers are cutting back on discretionary spending, while global trade tensions and inflation erode growth. Investors who cling to cyclicals now risk significant losses.

Immediate action is required:
- Rotate out of consumer discretionary and retail stocks.
- Build exposure to utilities, healthcare, and staples for steady returns and downside protection.

The data is clear—the next phase of the market favors stability over speculation. Don’t wait for the next tariff shock or GDP decline—act now.