Why are investors selling Woolworths, Coles and Telstra shares?

A major de-escalation in US-China trade tensions pumped life back into global equity markets, with the S&P 500 erasing its year-to-date losses and fueling a V-shaped rally in the Australian market from early April lows.

The S&P/ASX 200 climbed 0.43% to 8,269 on Tuesday, its highest close since February 28, reflecting a nearly 13% surge from April 7.

While the index showed strength, sector performance varied. A risk-on session prompted investors to shift from defensive sectors like telecoms (-0.7%), real estate (-1.1%), and consumer staples (-2.6%) to growth-oriented sectors like technology (+3.3%) and energy (+3.0%), with notable declines in stocks such as Coles (-3.5%), Woolworths (-3.5%), and Telstra (-2.6%).

Defensive Stocks Under Pressure

Macquarie analysts noted on Tuesday that defensive sectors, such as supermarkets, gold-related stocks, and telecoms, which rallied after the April 7 ‘Liberation Day’ announcement, may face near-term underperformance.

During the April 7 selloff, when the S&P/ASX 200 plummeted 4.2%, Telcos and Staples outperformed, down just 0.9% and 1.8%, respectively, and similarly cushioned losses during a 1.8% dip on April 9, declining just 0.7% and 0.6%.

Two Perspectives on the Shift

The recent weakness can be viewed through two lenses:

Mean reversion: Defensive stocks, which saw strong demand during heightened macroeconomic uncertainty, are now reverting to prior levels as trade tensions ease.

Market rotation: With improving US trade prospects, cooler-than-expected inflation, and optimistic economic forecasts, investors are shifting from defensive stocks — known for resilient earnings in volatile conditions — to growth sectors like Technology, which offer greater upside potential.

Recent performance

Following the April 7 ‘Liberation Day’ announcement, defensive stocks like Woolworths, Coles, and Telstra steadily rose, recording several successive year-to-date highs, while the broader market took approximately three weeks to recover to breakeven levels.

S&P/ASX 200 (black) vs. Coles (red), Telsta (orange), Woolworths (green) and S&P/ASX 200 Info Tech Index (blue) | Source: TradingView

As tariff-related concerns eased in early May, these defensive stocks paused their ascent, while the Info Tech Index (blue) staged a strong rebound. Despite this, the Tech Index remains slightly down year-to-date, whereas Coles and Telstra have gained over 10%.

Still sound fundamentals

Despite underperformance in early May, defensive stocks like Telstra, Coles, and Woolworths continue to show robust fundamentals, with their latest earnings largely surpassing market expectations.

Telstra (ASX: TLS) shares have surged approximately 15% since its February 19 half-year FY25 result, driven by slightly better-than-expected EBITDA from strong cost management, despite a marginal NPAT miss due to elevated depreciation and amortisation costs.

Key highlights include a 5.6% increase in the interim dividend to 9.5 cents per share and a $750 million on-market buyback, with management expressing confidence in sustained dividend growth. Strong free cash flow, improving returns, and disciplined capital management have kept sentiment positive, though higher D&A led to trimmed bottom-line estimates. Telstra remains a favored defensive stock, with upcoming strategy updates expected to provide further catalysts.

Coles (ASX: COL) has significantly outperformed Woolworths over the past 18 months, a trend that began with its August 2024 FY24 results. These results addressed challenges like theft, supply chain disruptions, shrinkage, and spoilage, while the ‘Simplify and Save’ initiative and new customer fulfillment centers drove improved performance. The stock soared as much as 42% between its February 26, 2024, half-year FY24 result and May 12, 2025.

The bottom line

Tariff-related and macroeconomic volatility drove strong demand for defensive stocks, pushing their valuations to relative highs. As these concerns subside, investors are rotating back toward growth-oriented market segments, causing these defensive names to give back some of their recent gains. Nevertheless, Telstra, Coles, and Woolworths have delivered strong year-to-date returns, supported by robust earnings, positioning them as resilient options despite recent declines.