Amid concerns of an economic slowdown and potential recession, Morgan Stanley's equity strategists have spotlighted a selection of defensive stocks expected to deliver robust growth and strong returns. These stocks, less volatile than the broader market, are seen as a shield against possible recessions and belong to sectors less exposed to cutbacks in consumer and business spending, such as groceries, small household products, healthcare insurance, pharmaceuticals, and utilities.
The Federal Reserve's interest-rate hikes aimed at curbing inflation by reducing economic demand have prompted many Wall Street analysts to forecast a recession. Despite this outlook, economic demand has remained relatively stable so far, suggesting that growth could continue to slow with a recession potentially occurring next year.
In response to these conditions, Morgan Stanley's team conducted a screening of companies with the 1,000 largest market capitalizations for stocks demonstrating below-average volatility over the past 252 days. These had to be classified as "growth stocks" according to the bank's statistical model and hold Overweight ratings from relevant Morgan Stanley analysts. The list includes companies such as Apple (NASDAQ:AAPL), Boston Scientific (NYSE:BSX), Costco Wholesale (NASDAQ:COST), and Monster Beverage (NASDAQ:MNST).
UnitedHealth Group (NYSE:UNH) was also featured in the selection. Given that health insurance is deemed a necessity even in financially challenging times, it is expected to see annualized sales growth of around 8% over three years beyond 2023, reaching $463 billion in 2026. This projection is based on the company attracting nearly a million new Medicare advantage members annually. UnitedHealth Group's profit margins are also projected to rise slightly over the coming years due to a decrease in its medical-cost ratio after this year’s surge in elective procedures.
Colgate-Palmolive (NYSE:CL) was another stock identified by Morgan Stanley’s screen. Despite consumers becoming more budget-conscious, sales are expected to grow annually at just over 4% to reach $21.9 billion in 2026 due to consumers' continued need for personal hygiene products. The company anticipates revenue growth from higher sales volumes, despite minor price increases in the near term, and expects costs to moderate in the future.
While these stocks are defensive in nature, they still offer significant upside potential. For instance, UnitedHealth Group's shares are trading at around 18.7 times earnings-per-share estimates for the next year, slightly above the S&P 500’s 18 times. Meanwhile, Colgate-Palmolive's stock trades at a somewhat pricey 21 times forward earnings, but it could maintain this valuation if a recession occurs and investors turn to consumer-staples stocks.
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