With stocks on track for one of their worst years in recent history amid concerns around persistent inflation, rate hikes from the Federal Reserve and rising recession risks, top firms on Wall Street say investors should turn to defensive stocks with stable margins and cash flow that should be able to weather a bear market.
Analysts at Evercore ISI on Thursday argued that several bank stocks are set to benefit from rising rates, after Fed officials indicated that they are prepared to continue aggressively hiking interest rates to combat inflation, according to minutes from the central bank’s latest policy meeting.
The firm’s top picks include Wells Fargo, First Republic Bank, Comerica and KeyCorp, all of which have more upside potential as rates rise, with balance sheet growth from loans and deposits while also having “less downside credit risk than peers if economic trends weaken.”
Jefferies analysts say that investors hoping to bet on the “resilient” American consumer should look no further than casual dining stocks, which are well positioned to capitalize on the recent shift in consumer spending from goods to services.
While the inflationary outlook remains worrisome, restaurant chains won’t see sales take too much of a hit and should still benefit from solid consumer spending, the firm says, pointing to the likes of Dave & Buster’s, Outback Steakhouse owner Bloomin’ Brands and the Cheesecake Factory as prime examples.
Earlier this week, Morgan Stanley chief U.S. equity strategist Mike Wilson predicted a further market selloff due to rising recession risks, though he did identify several “high-quality companies that can potentially weather this bear market,” particularly those with strong free cash flow.
He lists five defensive stock picks in the healthcare and consumer sectors which should achieve “growth at a reasonable price,” including Exxon Mobil, Coca-Cola, Deere & Co, Abbott Laboratories and CVS Health.
What To Watch For:
Strategists at UBS warned that stagflation—high inflation and slowing economic growth—is likely to persist, especially as markets have not yet priced this in. The bank recommends investors look at stocks with steady margins to weather stagflation—including consumer stocks such as Costco, Kroger, eBay and Procter & Gamble as well as Microsoft, Johnson & Johnson, Pfizer, Abbott Laboratories, Chevron and Exxon Mobil.
Inflationary pressures and the prospect of rising rates have led to rising recession fears which have weighed on investor sentiment. Stocks have posted seven weeks in a row of losses, with the S&P 500 briefly plunging into bear market territory last Friday and currently sits over 15% below its record highs in January. The latest Fed minutes released Wednesday show that there is a growing consensus about the growing need for tighter monetary policy, with most central bank officials agreeing that it would be necessary to raise interest rates by 0.50% intervals at the upcoming meetings in June and July.