By Lewis Krauskopf

NEW YORK (Reuters). Stock investors from the US are turning to defensive sectors as they fear that geopolitical uncertainty, and Federal Reserve’s infight against inflation will impact economic growth.

Although the overall market is down, the real estate, healthcare and utilities sectors posted positive gains in April, continuing an upward trend which has seen them surpass the previous year.

Investors are increasingly attracted to them as they worry that the Fed will clog the U.S. Economy as it intensifies its tightening policy to counter rising consumer prices. Though growth is strong now, several big Wall Street banks have raised concerns the Fed’s aggressive measures could bring about a recession as they work their way through the economy.

Last month’s alarm signal from the U.S. Treasury Market was that short-term yields for some maturities of government bond bonds were higher than those on longer terms. This phenomenon is known as the inverted yield curve. It has been seen before past recessions. However, investors remain worried about fallout from Ukraine’s war.

Walter Todd, Greenwood Capital’s chief investment officer said that defensive stocks outperform because people perceive all the headwinds to growth.

While the S&P 500 has fallen nearly 8% in 2022, utilities have gained over 6%, staples has climbed 2.5%, healthcare has dipped 1.7% and real estate has declined 6%.

With earnings season kicking into high gear next week, defensive sector companies reporting include healthcare giant Johnson & Johnson (NYSE:) and staples stalwart Procter & Gamble (NYSE:). Investors can also monitor earnings reports from Netflix (NASDAQ) and Tesla (NASDAQ).

The signs that U.S. corporate profits are expected to rise this year may be a boon for banks, travel agencies, and other market segments such as banks or companies that can benefit from a growing economy or tech names with high growth that has pushed stocks higher over the past decade.

The past has shown the value of defensive stocks. DataTrek Research found that the healthcare, utilities and staples sectors outperformed the S&P 500 by as much as 15 to 20 percentage points during periods of economic uncertainty over the past 20 years.

Lauren Goodwin is an economist at New York Life Investments. She also serves as a portfolio strategist.

Expectations of a more hawkish Fed have “increased the risk that this economic cycle is shorter and accelerated our allocation shift toward these defensive equity sectors,” Goodwin said.

The Fed – which raised rates by 25 basis points last month – has signaled it is ready to employ meatier rate hikes and speedily unwind its nearly $9 trillion balance sheet to bring down inflation. The geopolitical uncertainties resulting from the Ukraine war have caused uncertainty in investors and driven up inflation.

According to Edward Jones senior investment strategist Mona Mahajan: “Defense stocks may also be inflationary hedges to some degree”

Mahajan stated, “When you consider where there’s a little more pricing power consumers will need to buy their staples and their healthcare. They also have to pay their utilities bills regardless of price rises.”

Investors are not all pessimistic on the economic outlook. Many believe momentum could shift quickly to another area of the stock market if the economy appears strong.

Art Hogan, chief market strategist at National Securities, puts the chance of a recession this year at 35%, “but it’s not our base case.”

“As concerns over an impending recession recede, I think the sponsorship of the defensives will recede with that,” Hogan said.

Their valuations have risen due to the surge in defensive shares. Refinitiv datastream shows that utilities are trading at 21.9x their forward earnings estimates. It is also well over its 5-year average price to earnnings ratio, 18.3x. While healthcare trades at a 5% premium, the staples sector has a 11% premium to its average five-year forward P/E.

“It would not surprise me at all to see some mean reversion on this trade for a period of time,” Todd said. “But as long as these concerns around growth persist, then you could continue to see those areas relatively outperform.”