U.S. Stock Market Resilience During Government Shutdowns: Identifying Undervalued Sectors for 2025

The U.S. stock market has historically demonstrated remarkable resilience during government shutdowns, with the S&P 500 averaging a 0.2% return across 22 shutdowns since 1976 and rebounding with an average 1.2% gain one month post-resolution, according to a Motley Fool analysis. While political uncertainty often triggers short-term volatility, the market's forward-looking nature typically discounts temporary disruptions, allowing investors to capitalize on opportunities in undervalued sectors. This analysis explores sectors that have historically outperformed during political uncertainty and evaluates their current valuation status to identify potential investment opportunities in 2025.

Historical Sector Performance During Shutdowns

Defensive sectors such as healthcare and utilities have consistently outperformed during government shutdowns. For example, during the 35-day 2018–2019 shutdown-the longest in U.S. history-the S&P 500 gained 10.3%, driven by dovish Federal Reserve policy and investor flight to safety, according to a CNBC report. Healthcare, in particular, saw a 2.3% gain since 1995 during shutdowns, reflecting its stable demand and low sensitivity to government spending, per Morgan Stanley. Similarly, utilities, which rely on consistent consumer demand, have historically maintained steady performance despite broader market fluctuations, as shown by Landmark Wealth Management.

Conversely, sectors reliant on federal contracts, such as defense and aerospace, often face short-term dislocations. During the 2013 shutdown, defense contractors experienced delayed payments and reduced operations, leading to temporary declines, according to Cabot Wealth. However, these sectors can present opportunities for active investors, as seen in October 2025, when government services contractors surged by 2.28% amid expectations of post-shutdown catch-up spending, per YCharts.

Current Valuation Trends and Opportunities

As of October 2025, the healthcare sector trades at a trailing P/E ratio of 25.14, categorized as "Fair" relative to its historical average of 21.37, according to World PE Ratio. This valuation aligns with its defensive characteristics and consistent earnings growth, making it an attractive option for investors seeking stability during political uncertainty. In contrast, the utilities sector, with a P/E of 21.91, is deemed "Overvalued," suggesting limited upside potential despite its historical resilience, per Siblis Research.

The defense and aerospace sector, while historically vulnerable to shutdown-related disruptions, is currently overvalued, with a P/E ratio of 42.7x-well above its 3-year average of 30.9x, according to CSI Market. This premium reflects investor optimism about long-term growth drivers such as rising defense budgets and global demand for maintenance, repair, and overhaul (MRO) services. However, the sector's high valuation leaves it exposed to corrections if funding delays persist or geopolitical tensions ease.

Strategic Implications for Investors

The key takeaway is that while government shutdowns create short-term uncertainty, they rarely alter the broader market trajectory. Investors should prioritize sectors with strong fundamentals and favorable valuations. Healthcare, with its defensive profile and fair valuation, offers a compelling case for capital preservation. Meanwhile, defense and aerospace, though overvalued, could provide asymmetric upside if shutdowns resolve quickly and catch-up spending accelerates.

For sectors like energy and real estate, which have shown mixed performance during political uncertainty, caution is warranted. Energy, for instance, trades at a P/E of 17.46 (overvalued) amid volatile oil prices and supply chain risks, per a Schwab sector outlook. Real estate, with a P/E of 35.10 (fair), remains sensitive to interest rate shifts but has demonstrated resilience in past shutdowns, according to Meridian Capital.

Conclusion

The U.S. stock market's historical resilience during government shutdowns underscores the importance of sector-specific analysis. Defensive sectors like healthcare and utilities have consistently outperformed, while overvalued sectors such as defense/aerospace and energy require careful monitoring. By focusing on undervalued or fairly valued sectors with strong fundamentals, investors can navigate political uncertainty and position themselves for long-term gains.