Why defensive stocks are ideal amid profits recession

Experts recommend that investors explore opportunities outside U.S. market

Why defensive stocks are ideal amid profits recession

The most recent report from Richard Bernstein Advisors, an asset manager with $13.5 billion in assets, suggests that investors start the year by taking a defensive stance.

Historically, when corporate earnings have been dropping, defensive sectors have outperformed benchmarks. During each phase of declining profits from September 1989 to 2020, health care equities within the S&P 500 index had an average cumulative total return of 28%. The broader index, meanwhile, saw average returns of 15%.

Over those same periods, RBA reports other defensive sectors like consumer staples (24%), utilities (23%), communications services (18%), and consumer discretionary (17%) also outperformed the S&P 500.

Defensive equities -- the majority of which are dividend payers with steady profitability -- did well throughout the market turbulence of 2022. They often are seen as safer options during recessionary times, even though they frequently underperform growth or cyclical companies in bull markets.

In a recent analysis, Institutional Investor found that dividend stocks increased by 2% between January and October 2022, outperforming the market by more than 20%.

“An apparent limited fear of a potential profits recession suggests investors should start 2023 playing ‘defense,’” according to RBA. “Defensive sectors tend to outperform during profits downturns, and our portfolios are overweight those sectors.”

RBA also recommended that investors move outside of the United States because of the possible earnings slowdown.

As of the third quarter of 2022, European equities are the least likely to come as a shock to investors with disappointing profits.

Some investors could worry that making investments in defensive industries would keep them from participating in growth opportunities in the second half of 2023. However, RBA asserts that this shouldn't raise too many issues.

“If there is a fundamentally-based turn in the economy and in the stock market, such bull markets last for years and not for weeks or months,” according to RBA. “Missing out on the first month or two tends not to hurt long-term performance.