Investment bank Goldman Sachs has highlighted 23 defensive health care and consumer staples stocks as a hedge against slowing artificial intelligence momentum, following warnings that AI capital spending will no longer drive market earnings at the same rate. Analysts led by Ben Snider estimate AI capex has accounted for roughly half of overall S&P 500 earnings growth, but project that S&P 500 profit growth will decelerate from around 29% in 2026 down to 18% in 2027.
Tech Sector Revisions and Interest Rate Pressure
Months of sustained interest rate pressure have increased capital costs, leading financial markets to compress valuation expectations. Goldman’s Cyclicals vs. Defensives pair dropped 6% over a two-week span, signaling pronounced underperformance in cyclical names relative to defensive assets.
The shift mirrors recent tactical adjustments across Wall Street. On October 14, RBC Capital Markets downgraded technology to market weight and recommended health care instead. Lori Calvasina, RBC’s head of US equity strategy, pointed out that while upward earnings revisions remain solid for overall tech, momentum has moderated for semiconductor and equipment makers in the Russell 3000. The sector has faced mounting headwind, reminiscent of recent market pullbacks where chip stocks lost trillions during extended bond yield routs. Consequently, the Philadelphia Semiconductor Index dropped 11.4% in a single week, marking its sharpest weekly loss since April 2025.
Defensive Shortlist Anchored by Free Cash Flow
To identify resilience in a slowing growth environment, Goldman Sachs screened for low-volatility consumer staples and health care equities displaying high free cash flow yields. Topping the shortlist is Tyson Foods, which features an 11% trailing four-quarter free cash flow yield and a 3.72% dividend yield. Tyson Foods shares closed at $54 on October 19, down 7.9% year-to-date in 2026 and 16.8% over the past six months.
CVS Health also made the list with a 9% free cash flow yield and a 2.88% dividend yield. While CVS Health has gained 16.8% year-to-date, it experienced a 15% decline over the past three months. Additional screened equities and their year-to-date returns as of October 19 include Royalty Pharma (+56.0%), Merck (+36.5%), Quest Diagnostics (+35.4%), US Foods (+33.3%), JM Smucker (+29.9%), Church & Dwight (+24.1%), AbbVie (+23.7%), McKesson (+23.2%), Cardinal Health (+22.9%), Colgate-Palmolive (+18.2%), Chemed (+18.8%), Mondelez International (+17.7%), Sysco (+10.7%), Kenvue (+9.4%), Performance Food Group (+6.4%), Kroger (+0.9%), ResMed (-0.5%), HCA Healthcare (-2.6%), Hershey (-8.2%), Hormel Foods (-14.1%), and Abbott Laboratories (-16.9%).
Key Takeaways:
- Goldman Sachs projects S&P 500 earnings growth to decline from 29% in 2026 to 18% in 2027 as AI spending growth cools.
- The Philadelphia Semiconductor Index plummeted 11.4% in one week, its worst retreat since April 2025.
- Tyson Foods (11% FCF yield) and CVS Health (9% FCF yield) lead Goldman's 23-stock defensive selection list.
Why It Matters
Wall Street's rotation away from AI concentration toward high-cash-flow defensive sectors highlights growing institutional fatigue over sky-high technology valuations. As high-profile market observers have noted—such as when Jeremy Siegel warned the Nasdaq Composite could fall 30% if AI returns falter—capital allocation is pivoting toward fundamental balance sheet strength. If broader economic growth moderates into 2027 as macro forecasts predict, cash-generative health care and staples equities offer institutional portfolios essential downside protection.
