Sector Pulse: Staples Defying "Haven" Reputation

When war flares and markets cool, investors often seek safer places to shelter. Historically, one of them is the S&P 500 consumer staples sector, home of dull but steady companies that make things like toothpaste and soda.

As investors may have heard, consumers still need diapers and paper towels even when there's an economic downturn, meaning staples firms tend to be resilient in the face of recessions and oil spikes.

"Consumer staples is relatively insensitive to economic cycles and historically has provided stability during economic downturns," said the Schwab Center for Financial Research, or SCFR, in a Sector Views outlook earlier this month. "It may also provide outperformance during periods of market volatility and uncertainty."

The market is in one of those periods now due to the recent war with Iran. However, staples didn't initially live up to their historic reputation. For the first two weeks after fighting erupted, staples fell 5.1%, worse than the 3.6% decline for the S&P 500^® Index (SPX).

Issues hurting staples now include heavier exposure to international economies, lower rate cut odds, and a relatively high price-to-earnings (P/E) ratio.

However, investors might be foolish to count staples out in the long run despite those and other recent headwinds, including relatively slow revenue growth and input price pressures and tariffs that have pressured margins and weighed on earnings growth.

"If the Iran war persists and the resulting energy shock is prolonged, markets could likely move to price in rising recession risk. However, I wouldn't assume staples underperforms in that scenario," said Chris Ferrarone, managing director and head of Equity Research and Strategy at SCFR.

"So far, market pricing indicates investors are more concerned about inflation than growth—and that's a headwind to staples," Ferrarone added. "But a shift in sentiment toward growth concerns would likely result in a change in relative pricing."

For many years, staples had less exposure than most other sectors to economies overseas, providing something of a domestic shield when things became tough abroad. In mid-2017, only 27% of staples sector revenue came from countries beyond the United States. That rose to 39% as of early this year, according to FactSet.

The Iran war initially hurt non-U.S. economies more than the United States, mainly because the United States is less dependent on the Middle East for energy. This puts sectors like staples—now the fourth-most-exposed sector to revenue from abroad—in harm's way.

The U.S. dollar rally that accompanied the breakout of hostilities in the Middle East is another problem for a more internationally oriented staples sector. So far, the dollar's roughly 5% rally from four-year lows isn't overly remarkable, and the dollar remains well below peaks seen in early 2025. It might take a longer stretch of dollar strength to really clip export-oriented firms, but it's something to consider watching.

Beyond the stronger dollar and international economic pain, the war means logistical challenges for U.S. exporters. Though Honeywell International (HON) is an industrials stock, not a staple, the company noted at a March 17 investor conference that the Middle East conflict is creating difficulties.

"It's not that we're losing volume, but if I can't physically send things, it can have a transitionary impact," said Honeywell CEO Vimal Kapur, according to Barron's.

The same could prove true for staples firms with big sales in the Middle East like Coca-Cola (KO) and Procter & Gamble (PG). These two firms already faced pressure in the region from boycotts of their products due to alleged company connections to Israel.

This follows pressure on exporters last year from the sudden spike in U.S. tariffs, mostly paid for by U.S. companies. Though there's hope companies might see refunds after the Supreme Court ruled against one element of the Trump administration's tariff policies, it's likely to be a long and arduous process.

Another headwind for staples is something the sector was dealing with even before its new export challenges: margin pressure.

The largest U.S. staples sector firm, Walmart (WMT), disappointed investors in February when it guided fiscal-year net sales to increase just 3.5% to 4.5% and adjusted earnings per share (EPS) to range between $2.75 and $2.85. Investors had expected $2.96, according to the London Stock Exchange Group (LSEG). This reflects not just continuing weak sales growth but ongoing margin pressures.

Profit margins remain an issue for staples and came in at 7.1% for 2025, only 20 basis points above 2024. By contrast, the SPX delivered a 13.8% net profit margin in 2025, up 100 basis points from the year before.

"The staples sector is highly competitive, which can affect profitability," SCFR said. "Tariffs and input cost inflation can pressure profit margins."

On a positive note for staples, analysts expect sector earnings to rebound by the end of this year after a very soft 2025 and finish 2026 with a year-over-year gain of 6.1%. That's still down from where they saw things at the end of 2025 but well above expectations for first-quarter EPS growth of 1.6% and 2025 growth of just 0.4%, according to FactSet.

Analysts see staples revenue up 5.8% this year, an improvement from 3.6% in 2025, FactSet said.

Walmart CFO John Rainey told CNBC in a February interview that the tariff impact should ease in the coming months. "It seems to be a little bit more of a normalized price environment," he said. "I think we have, largely as a retail industry, absorbed or seen the brunt of the impact from tariffs."

Another headwind for staples is lack of AI excitement. Though the recent "AI cascade" had positive and negative impacts on stocks across the spectrum and many staples firms employ AI to improve efficiency, investors and the companies themselves seem less keyed in on how AI might affect the sector.

Only 39% of staples firms cited AI in their fourth-quarter earnings calls, according to FactSet, compared with 94% of tech firms, which makes sense. Still, 64% of consumer discretionary companies mentioned AI, leaving staples well behind.

That said, it's not necessarily a bad thing for staples to march to a different AI drum.

"AI mentions in earnings calls have arguably turned from a strong positive factor a year ago to more of a negative one more recently given concerns that spending on AI may not result in the immediate benefits the market had been assuming," Schwab's Ferrarone said. "It's unclear how these dynamics will play out, but more subdued AI spending from staples companies may prove to be relatively positive in the near term. MIT and others have published studies recently that show many AI projects are not delivering results for companies."

Another challenge is staples' hefty P/E ratio. It's above that of the SPX, in fact.

Typically, investors buy stocks in hopes of future earnings growth, meaning a lower P/E can often be seen as a buying opportunity. Staples defy that, to some extent, with investors often dipping their toes into the sector not expecting big growth but instead relatively reliable earnings and decent dividends at what's often a price discount to faster-growing sectors.

With staples sporting a P/E of 23.1 versus the next 12 months of projected earnings as of mid-March, according to research firm CFRA, it's hard to say they're cheap.

In contrast, the SPX had a P/E of 21.6, well above its five-year average near 20. Staples make up just 5% of the SPX's value, much of which is concentrated in traditionally faster-growing sectors.

While investors often pay up for more anticipated growth—which explains why one can find tech and consumer discretionary stocks trading at 50 or even 100 times earnings—staples aren't a sector typically associated with the kind of rapid earnings growth that justifies high sector valuations.

Costco (COST) is one of several well-known staples companies with higher-than-average valuations. Some of this could reflect "safe haven" investors entering the sector even before the Iran war as inflation and jobs worries grew. It also might reflect what many analysts saw as a major sector "rotation" out of tech stocks and into traditionally less-favored areas starting last fall.

Hopes of declining interest rates—typically positive for dividend-paying firms because it can make their dividend yields look more competitive—also could have hustled some investors into staples late last year before rate cut odds fell as inflation surged.

Staples rose 9.4% over the six months through mid-March versus 3.8% for the SPX and –0.2% for the tech sector. That gave investors in this sometimes-overlooked sector a nice ride but also helped send the sector's P/E up to 23.1 from an already high 21.1 in late November.

For all the negatives staring down staples, it's a bridge too far to suggest that their recent poor performance as the war began has long-term implications for a sector that can offer stability and dividends in times of economic trouble.

"The argument that staples has lost its 'safe-haven' status based on the performance since the start of the Iran war is one I'd push back against," Ferrarone said. "Should we find ourselves in a scenario where concerns about recession risk are rising, the relatively steady earnings of consumer staples may become attractive to investors. "