As U.S. economic growth slows toward the 2% threshold, sector selection becomes one of the most powerful tools investors have to protect returns. According to Jefferies, a data-backed approach rooted in historical performance reveals which sectors tend to thrive—and which consistently falter—during periods of sub-trend GDP growth.
Despite cutting its earnings forecasts due to weak revisions and deeper cyclical cuts, Jefferies is holding firm to its current sector strategy, highlighting a select group of outperformers and underperformers based on how these segments have behaved during past low-growth years.
Health Care Leads in Sluggish Economies
Health care continues to show strength even amid recent small-cap volatility. Jefferies notes that during years of below-average GDP expansion, health care stocks have delivered some of the strongest returns, frequently in the double digits. That trend is playing out again in 2024, with the sector outperforming broader small-cap indices—buoyed in part by a surge in sub-$1 billion M&A deals, which remain well above trend.
Despite short-term underperformance, investors scanning valuation multiples can see that the health care sector’s P/E ratio remains competitive compared to overheated areas of the market, suggesting long-term upside remains intact.
Defensive Plays in Consumer Staples and Discretionary
While Jefferies is underweight both consumer staples and discretionary names due to balance sheet pressures and stretched valuations, history shows these sectors tend to fare well when growth is soft. Consumer staples benefit from consistent demand, and certain discretionary segments—especially those tied to low-ticket, habitual spending—have held up even during contractionary periods.
Performance trends across both sectors, visible through long-term sector historical data, support the idea that defensiveness and selectivity—not broad exposure—are key to harvesting returns from consumer names in a cooling economy.
Avoiding the Laggards: Energy and Communication Services
The gap between leading and lagging sectors widens dramatically when growth falls below 2%. Nowhere is this more visible than in energy, which has fallen nearly 30% since late November—worse than typical early-recession declines. Communication services hasn’t fared much better, staying deeply in the red for most of the year.
These sectors are often tied to macro-sensitive inputs like global demand, commodity cycles, and advertising budgets—areas that tend to contract first and recover last in a slowing economy. Their weak earnings outlooks, coupled with negative momentum seen in recent sector performance data, give little reason for optimism in the near term.
What About the Rest?
Small-cap earnings expectations for 2025 have taken a significant hit, particularly across cyclicals, energy, and materials. Utilities, once a reliable safe haven, now trade at the highest valuation among all sectors, followed closely by tech. Jefferies warns these names may have become “crowded trades” driven by ETF flows rather than fundamentals.
Instead, the firm sees better valuation opportunities in financials and industrials—areas not as heavily bid up and still showing room for upside on a relative basis. Current sector-level P/E ratios support this case, showing more reasonable pricing in these segments compared to richly valued defensives.
Bottom Line
In a market defined by muted growth and cautious sentiment, positioning matters. Health care continues to deliver solid performance in soft environments, while select opportunities remain in staples and discretionary—provided investors watch for balance sheet strength and pricing discipline. On the other end of the spectrum, energy and communication services show structural and cyclical headwinds that make them difficult to justify in portfolios right now.
By letting historical data and real-time sector metrics guide allocation decisions, investors can navigate low-growth periods with more clarity—and better risk-adjusted outcomes.
