A downturn is coming, and investors should eye three sectors that have priced it in, Binky Chadha told CNBC.
Consumer cyclicals, financials, and materials have priced in a potential recession, the Deutsche Bank stock strategist said.
“If a lot’s already priced in, then if it happens, the risk-reward is still positive. “
Some sectors of the stock market have already priced in an economic slowdown, and investors should pile in as a downturn is coming in the first half of this year, Deutsche Bank’s top stock strategist said.
Speaking with CNBC on Friday, Deutsche Bank’s Binky Chadha said markets have been nervous about a possible recession in the first half of 2024, and investors should use that to their advantage.
“What you want to think about is what’s priced in, basically across sectors and industry groups for recession,” he said. “If a lot’s already priced in, then if it happens, the risk-reward is still positive.”
Pockets of the market that are already pricing in a coming downturn include financials, consumer cyclicals, and materials, Chadha said. Sentiment seems downbeat in those groups, suggesting the slowdown risks are built in. So if a downturn does in fact hit the US, they’re unlikely to fall very far.
Cyclical sectors like auto manufacturing and restaurants haven’t mirrored the blockbuster rally in the broader market that closed out 2023. On the other hand, the S&P 500 Financials index is sitting at its highest level in almost two years.
“The most important catalyst is really earnings,” Chadha added. “We start next Friday, and I think the thing to keep in mind here on the earnings is that if you look at the bottom-up consensus for what it expects, basically for earnings, it would be one of the worst quarters of growth outside of a recession.”
Nonfarm payrolls data released on Friday showed the US economy added 216,000 jobs, blowing past expectations and confirming that the economy is still on solid footing. But as US stocks begin the year on a slippery note, Wall Street is growing wary of risks that could knock stocks further down.
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