Analysts say S&P 500 too risky, recommend defensive stocks instead

Wall Street strategists are urging caution on the S&P 500, warning that the index’s “risks are skewed to the downside.”

With policy risks rising and economic momentum fading, Stifel analyst Thomas Carroll is advising investors to shift away from the S&P 500 and focus on staples, healthcare, utilities, gold, and low-volatility stocks.

“We continue recommending an over-weight of defensive value,” Carroll wrote in his latest note. “The S&P 500 appears to us to have risks skewed to the downside.”

A key U.S. economic indicator—the Purchasing Manager’s Index (PMI)—set for release Monday, could paint an overly optimistic picture—one that may not reflect underlying market risks.

According to S&P Global chief economist Chris Williamson, companies are rushing to complete projects ahead of upcoming tariffs.

PMI flashes warning signs

The early read on February’s PMI report suggests the U.S. economy is losing steam. Growth slowed to the weakest pace since last year, falling behind Japan and the UK and barely edging out the eurozone.

A downturn in the services sector is a major red flag.

The U.S. is now the only major economy where services are contracting. Companies widely cited uncertainty over government policies—including federal spending cuts and looming tariffs—as reasons for weaker sales and business activity.

On March 4, the U.S. will double tariffs on China from 10% to 20% and impose a 25% import tax on goods from Canada, Mexico, and the European Union. This uncertainty is already weighing on business sentiment.

Defensive sectors outperforming

So far, three of Carroll’s recommended defensive sectors—healthcare, utilities, and consumer staples—are among six industries seeing double-digit gains this year, according to FactSet.

Financials, communication services, and consumer discretionary stocks are also leading.

Despite the S&P 500’s overall strength, it’s underperforming historical revenue benchmarks. FactSet data shows only 63% of companies beat revenue estimates, below the five-year average of 69% and the ten-year average of 64%

IT and healthcare firms continue to top earnings expectations, while utilities and materials are missing the mark. The biggest revenue gains this year have come from financials, healthcare, and consumer discretionary stocks.

In the healthcare space, Cencora (CNC), Cigna Group (CI), and Centene (CNC) have been standouts. In consumer discretionary, General Motors (GM) is one of the few names beating expectations.

Utilities, on the other hand, have been the worst-performing sector for revenue surprises.