After a beaten-down first half for stocks that ranked among the worst in decades, investors are now bracing for continued volatility. A growing chorus of recession warnings have emerged on Wall Street as market watchers weigh the likelihood that an aggressive rate hike cycle by the Federal Reserve will curtail growth. As it stands, the U.S. economy has likely already entered a technical recession , according to a Federal Reserve tracker of economic growth. The bond market has also flashed a signal that a recession could be on the cards. “The bear case is actually becoming in some ways the base case, because the recession that everybody was reluctant to even mention just a couple of months ago, seems to be upon us,” Ernesto Ramos, head of integrated equity at Columbia Threadneedle Investments, told CNBC “Squawk Box Asia” on Wednesday. So how should investors position in such an environment? Three pros share their take. Stay defensive, diversified Ben Snider, senior strategist at Goldman Sachs , says investors should favor “relatively defensive” stocks where earnings streams and future earnings growth are less correlated to economic cycles. He likes the health care sector which he believes is “very defensive” and has a track record of earnings growth over the past six recessions. Snider added that the sector is trading at close to its long-term average valuation. Ramos of Columbia Threadneedle is also a fan of health care. He noted that U.S. health care payments are typically paid out by insurers rather than consumers, reducing the sector’s reliance on disposable income which has been hit by rising gas and food prices. “That’s what makes it such an attractive and stable sector in good and bad times,” Ramos said. Gary Schlossberg, global strategist at Wells Fargo Investment Institute, believes portfolio diversification is key. “We look for high-quality liquid stocks found largely in large-caps and to some extent, mid-caps as well. By sector, we have taken on more of a defensive mode — those less economically sensitive sectors of the market, such as energy, healthcare and even technology,” he said. ‘Attractively valued’ stocks Ramos also likes “attractively valued” tech companies. Within this space, he prefers profitable companies that are able to redistribute some of their profits back to investors. Facebook parent Meta is a favorite, described by Ramos as a “relative safe “company with “quite attractive” profits. Ramos is also bullish on the semiconductor sector, given the “acute” need for semiconductors around the world. Schlossberg of Wells Fargo says the longer-term outlook for the tech sector remains favorable. Within the sector, he prefers mega-cap stocks for their liquidity and high quality. Snider of Goldman Sachs also highlighted stocks with high dividend growth. “If you look at the [past] seven years, dividend stocks do very well despite high bond yields. And that is important because of the inflation-protected nature of corporate cash flows and the dividend coupons they pay. These stocks have actually done very well this year, despite all the headwinds, and remain very attractively valued in our view,” he said. Read more Citi names its ‘highest conviction ideas’ for the second half of 2022 — and gives one upside of 85% Wall Street believes these beaten-down global stocks are set for a rebound Wall Street banks name their top global stocks for the second half — and give three over 70% upside Be mindful of valuations But investors should also pay attention to valuations, particularly in an environment of rising earnings risks, according to Snider. He noted that while the utilities sector has performed fairly well this year, it trades at a price-to-earnings multiple that is at a 20% premium to the broad market. “That’s effectively the highest valuation on record,” Snider said. “And that explains why, even though the economy is at the top of investors’ minds, the utility sector can still underperform because it’s fully priced.”
