Recession-proof stocks are leading the market's latest leg higher

Stocks have rebounded from a rough April, led by two sectors that typically outperform when the economy is in a downturn.

Since April 16, around when the S&P 500 (^GSPC) hit its recent bottom, Utilities (XLU) have led the charge, rising nearly 12%, accounting for all of the sector's gains year to date. Consumer Staples (XLP) stocks have risen almost 5% in that same period, while the S&P 500 is up about 2.7%.

Wall Street strategists said the two sectors are likely catching up after a dismal performance to start 2024.

Considering both sectors had been among the worst performers in the S&P 500 over the last year, Truist co-chief investment officer Keith Lerner reasoned there's an aspect of the move that is merely investors rotating into an area that has yet to participate much in the recent market rally.

The Utilities sector entered March trading at its largest discount to the S&P 500 from a valuation standpoint (using a forward price-to-earnings ratio) since 2009, per Lerner. Meanwhile, Consumer Staples had underperformed the S&P 500 by almost 30% over the last year. This presented a potential buying opportunity in both traditionally "defensive" sectors.

"With markets up so much as we're up since October, people get nervous," Lerner told Yahoo Finance. "They want to rotate into something a little more defensive, take some profit taking ... It's also just saying, 'Hey, what hasn't worked and what could have an opportunity to do some catching up or hold up better should the market correct?'"

There have been clear fundamental drivers of why Utilities would catch a bid over the past month. Earnings for the sector are up 26.7% this quarter compared to the same period last year. That's the second-highest growth rate of any sector, per FactSet. And there's growing conversation around how increased interest in projects involving artificial intelligence and electric vehicles could boost electricity demand for companies within the Utilities sector.

There have also been several macro catalysts at play. The move higher in Utilities, an interest rate-sensitive sector, has come as investors have digested the Fed's message last week that another rate hike is unlikely. This has sent the 10-year Treasury yield (^TNX) down about 20 basis points from its 2024 high, providing a reprieve for a sector that has typically fallen as yields rise over the past year.

Another key movement has come in economic data. After economic growth continued to surprise Wall Street to start the year, data took a turn in April, highlighted by a weaker-than-expected jobs report and contraction in manufacturing activity for the month.

And while this doesn't mean the US economy is definitely slowing down, it has caught investors' attention. Morgan Stanley's chief investment officer Mike Wilson wrote in a weekly note to clients on May 5 that investors "might want to consider a little bit of exposure to defensive sectors like Utilities and Consumer Staples" should manufacturing data continue to come in weak.

But the move higher in Utilities and Consumer Staples won't necessarily continue.

Charles Schwab senior investment strategist Kevin Gordon told Yahoo Finance he's "unsure" whether the defensive play will have staying power because when you look at what's been leading the market since the start of March, there are multiple different stories at work. Communications Services' (XLC) rise in the past few months shows a tilt toward growth, Gordon said. Energy (XLE) would lean cyclical. Meanwhile, Utilities' recent rise points to defensiveness.

All three sectors are now the top performers in the S&P 500 this year.

"That's not really sending me a clear message as to whether the markets risk on or risk off," Gordon said.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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