By Paul R. La Monica

While the Trump administration is showing a willingness to do trade deals, some economists aren't convinced that the worst is over for the U.S. economy. Investors will need to prepare for the possibility of a more severe deterioration in consumer and business spending.

Jan Hatzius of Goldman Sachs still puts the chance of a U.S. recession in the next 12 months at 45%. On Tuesday, he cited concerns about a trade war with China as well as "a meaningful risk that some of the paused 'reciprocal' tariffs will take effect after all."

Economists at JPMorgan are even more bearish: They said Monday they are maintaining their call of 60% odds of a recession in the second half of this year.

"This is not the beginning of the end of the trade war, but only the end of the beginning," the JPMorgan economists wrote.

So how should investors navigate this landscape? Investors are already worried about the impact of a trade war on consumer goods -- both for discretionary items and retailers as well as staples.

Clorox, for example, said in its latest earnings report Monday that it was lowering its outlook "to reflect recent changes in the macroeconomic and geopolitical environment...as well as the impact of tariffs." The stock tumbled 2% Tuesday on the news.

But consumer staples broadly are still holding up a lot better than the rest of the market. Clorox may be the exception rather than the rule. Coca-Cola is the top stock in the Dow Jones Industrial Average in 2025, while Philip Morris is one of the best performers in the S&P 500. Retailers Costco, Walmart and Kroger, which are classified as staples stocks, have enjoyed gains this year too.

Others are also highlighting the virtues of investing in more defensive stocks. The recent winning streak for the broader market may have been a head fake.

"The U.S. stock market is currently not pricing in a recession or even a meaningful slowdown. Investors appear to be expecting the 90-day tariff pause to become an off ramp for the Trump administration, allowing it time to slowly soften its aggressive trade policy without appearing to backtrack," said Emily Bowersock Hill, CEO and founding partner of asset management firm Bowersock Capital Partners, in an email.

"The unappreciated risk is that the vacillations and lack of clarity on tariffs has already damaged the economy enough to cause a slowdown," she added.

But Hill says there are still pockets of the market that look attractive. The technology sector remains a favorite, she said, noting that such stocks "will continue to benefit from the AI-driven productivity boost to economic growth." Hill recommends chip equipment company Lam Research.

Others noted that recent earnings from some of the members of the Magnificent Seven are a good sign for tech, too.

Anthony Saglimbene, chief market strategist with Ameriprise, said in a report that strong results from Microsoft and Meta Platforms are "somewhat putting to rest the idea that spending on artificial intelligence is slowing down amid the tariff uncertainty."

Some financial stocks also might be worth owning -- even if there is a recession. Hill said big banks should get a lift from the expectation that Trump will eventually push for deregulation of the industry and from hopes the Fed could start lowering interest rates again at some point this summer. Investors are betting on banks, too. The Financial Select Sector SPDR ETF, which has big holdings in JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, is up 2% this year.

The "digital payment adoption is likely to spur growth in parts of the financial sector," Hill adds. That would be good news for credit card lender/regional bank Capital One.

Finally, healthcare is a defensive sector that has held up well -- despite concerns about potential regulatory changes from the Trump administration and Health and Human Services Secretary Robert F. Kennedy Jr. and worries about insurer UnitedHealth's weak guidance.

Other healthcare stocks -- such as UnitedHealth rivals CVS (which owns insurer Aetna), Cigna and Elevance Health, drug companies Eli Lilly and Johnson & Johnson, and equipment makers Intuitive Surgical and Medtronic -- are all in positive territory this year. So is biotech Amgen, which Hill recommends.

It's worth noting that most of the stocks in these flight-to-safety sectors also pay solid dividends. The SPDR S&P Dividend ETF is flat this year. And with bond yields slipping as recession fears rise, owning stocks that provide steady income can help investors sleep better at night.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 06, 2025 14:14 ET (18:14 GMT)

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