Market uncertainty is becoming an increasingly common phenomenon in the 21st Century. Now, as the prospect of steep tariffs threatens to transform global trade, defensive stocks are once again showing their appeal to investors.

The dotcom bubble bursting, the 2008 financial crash, and the COVID-19 crisis have all led to recessions in the United States since the turn of the century, and recent fears surrounding President Trump’s reciprocal tariffs have stoked concerns that a fresh downturn could be on the horizon.

The S&P 500’s year-to-date performance sank more than 15% in the days that followed Trump’s tariff announcement and trade escalations against China before the imposition of 90-day delays paved the way for the index to fully recover by the end of May. However, with tariff delays set to expire on July 8, 2025, a lack of sufficient trade deals brokered between the US and affected countries could see market negativity take hold once again.

According to the Congressional Budget Office, the Republican bill to enact core elements of President Trump’s domestic policy agenda would add $2.4 trillion to deficits over the next decade, in a move that could drive further long-term economic uncertainty throughout the US.

According to Paul Skinner, investment director at Wellington, there is a ‘reasonable chance’ that the US economy is already in a recession.

However, economists at J.P. Morgan have scaled back their recession forecasts repeatedly on growing optimism that recent de-escalations on tariffs and the trade war with China could facilitate the return of optimism to Wall Street.

While the initial shock of Trump’s reciprocal tariffs prompted the investment bank to hike its probability of a recession to 60%, J.P. Morgan lowered its expectations to a ‘toss-up’ as the president delayed the imposition of trade levies.

Finally, in a May 27 report, J.P. Morgan economist Joseph Lupton acknowledged that a recession may not happen at all, claiming that Trump’s tariff reversal was a sign that the president has less tolerance for a ‘short-term pain, long-term gain’ strategy.

However, Lupton also highlighted that the bank still anticipates a challenging time for the US economy, indicating that investors may be best off still preparing for a recession in the future.

Recessions and Wall Street

Recessions are characterized by slow economic growth, which impacts the balance sheets of companies throughout Wall Street.

As sales and earnings slow, investors once bullish about the long-term prospects of speculative stocks that trade far beyond their price-to-earnings (P/E) ratio generally become fearful that their holdings are due a correction and revert to cautious picks instead.

Likewise, weaker corporate earnings can negatively impact corporate bonds, with holders becoming wary over the prospect of defaults.

However, recessionary factors like higher unemployment and downward pressure on wages can help to cool inflation and cause government bonds to improve their attractiveness for investors.

Generally speaking, investments that are recognized as ‘safer’ generally outperform their more risky counterparts. This leads to companies with more predictable earnings, like healthcare stocks and utilities, providing greater resilience than other firms that could be more exposed to the economic pressures of a recession, such as consumer discretionary stocks.

“Consumer staples and healthcare appear undervalued, offering defensive appeal in the current environment,” suggests Maxim Manturov, head of investment research at Freedom24. “Consumer staples, trading with P/E ratios closer to 18-20, benefit from stable demand regardless of economic cycles but have been overlooked as investors chased riskier assets earlier this year; tariff-driven inflation could further add to their pricing power.”

The threat of tariffs also offers some opportunities to investors. Placing 25% trade levies on steel and aluminium imports by President Trump has increased the costs for essential materials used in utility infrastructure, like transformers and transmission towers. This, coupled with higher tariffs on Canadian imports, has increased electricity and fuel costs, improving the appeal of utilities stocks.

As a popular defensive stock, utilities have already shown their value as a buy-and-hold option thanks to the prospect of regular dividend payments at attractive rates. Should tariffs build resilience among utilities stocks, we could see more investors identify them as a solid recession play.

Protection in a Downturn

The US economy appears to be showing some strength in the wake of Trump’s softer stance on trade tariffs, but the president’s recent threats of a 50% levy on imports from the EU show that the danger of aggressive tactics on trade may not be going away soon.

With this in mind, investors may be best off by adding a degree of diversification to their portfolios. In leveling out speculative stocks with more defensive counterparts, investors can set themselves up with a strategy that’s well-equipped for future downturns.

In 2025, that’s brought much uncertainty already, preparing for the worst can be a great way of futureproofing your investments.