Anika Begay
Stocks like Hershey and Microsoft could be the best hiding places as threats of an economic downturn persist, according to HSBC. Wall Street has been hit with volatility recently on the back of disappointing U.S. employment and manufacturing data. The conclusion of a popular hedge fund trade on the Japanese yen also sent shockwaves through global markets. The S&P 500 posted its biggest daily loss since 2022 on Aug. 5, but has since recovered from that retreat. “We expect volatility in the coming weeks as the market assesses the likelihood of recession risks and the magnitude of Fed rate cuts,” strategist Nicole Inui wrote in a note on Monday. “All indications are of near-term share price weakness and tactical positioning in defensive stocks.” Against this backdrop, HSBC highlighted 10 stocks it believes could be the best performers amid this near-term volatility and potential economic downturn. The company’s base case is that the Federal Reserve will start easing interest rates in September and that the U.S. economy will avoid a recession. Check out some of HSBC’s favorite stocks rated “buy” for a volatile market: Thermo Fisher Scientific is on the list. Analyst Sidharth Sahoo’s $690 price target on the stock means the shares can gain 15.2% over the next year. The stock has struggled over the past two years, falling 17% in 2022 and 3% in 2023, due to a slowdown in corporate sales related to Covid-19. Shares have risen 13% this year, with most of those gains coming in the past month, after the company reported higher second-quarter profit and raised its revenue and earnings expectations for the year. “TMO remains on a life sciences recovery path. While destocking trends have meant the sector has underperformed the broader market in 2023, earnings momentum remains on the upside trend reflecting the second consecutive quarter,” Sahoo said. The firm also remains bullish on the AI trade, particularly when it comes to Microsoft. According to analyst Stephen Bersey, Microsoft has strong defensive characteristics against macroeconomic weakness, given its business model and solid balance sheet, as well as high operating margins. In particular, Bersey noted that the tech giant’s majority of revenue sources are tied to long-term software as a service, or SaaS, or usage agreements that lock in its future revenue with recurring contracts. The length of those contracts is about two to three years, he believes. “Due to the critical positioning of its products and services within enterprises, we think it will be difficult for customers to materially reduce spending with Microsoft,” analyst Stephen Bersey said. “Additionally, Azure’s revenue growth and profitability are being fueled by the global proliferation of AI. And we see AI as a non-negotiable investment within most large companies … The company has a strong and sustainable competitive advantage and is very difficult to replace in most of its end markets.” His $533 price target implies about a 31% upside for the stock. Chocolate maker Hershey is another investment that could protect portfolios from an economic downturn, according to analyst Alejandro Zamacona. His $232 price target implies a potential 16.8% upside for the stock, which is up about 7% year to date. While Hershey shares have lagged the S&P 500 and the consumer staples sector this year due to higher cocoa prices, Zamacona expects the recent decline in cocoa prices to lead to an improvement in the company’s second-half earnings after a difficult first half. “Within packaged foods (a consumer staple), Hershey is our favorite name with a Buy rating, given its compelling valuation, potential upside surprises ahead amid potential cocoa price normalization, strong pricing power, low private label penetration, chocolate confectionery category leadership, and good capital management,” the analyst said. HSY .SPX,XLP YTD mountain HSY vs SPX and XLP in 2024 Other HSBC favorites include financial services firm American Express and big box retailer Walmart.
