As The Market's Momentum Has Waned, Wall Street's Favorite Defensive Stocks Are Emerging

The market may be losing some of its early-year vigor. Investors might profit in that situation by purchasing more defensive stocks.

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The S&P 500 has dropped for two consecutive weeks as concerns about inflation and rising Federal Reserve interest rates dampened investor enthusiasm. While Treasury yields increased to levels not seen since November, the broader market index plummeted more than 1% on Tuesday. Traders are also concerned about a possible impending recession.

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According to Trade Algo, the earnings season is almost over with 82% of S&P 500 businesses having reported as of Friday. According to Trade Algo, aggregate profits have outperformed expectations by 1.3%, falling short of both the one-year average of 3.7% and the five-year average of 8.6%.

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Yet, those who are concerned about the volatility of the stock market can buy defensive equities. They are seen as safer investments, but they are not expected to produce high profits. For instance, the S&P 500 is up 4.6% in 2023, while the Invesco Defensive Equity ETF (DEF) is up 1.3%.

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But, given their robust balance sheet and steady revenue stream, defensive stocks are probably better able to endure a market slump. Health care, utilities, and basic goods are among the sectors.

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In light of this, CNBC Pro searched for the top defense stocks on Wall Street. We looked for names in the DEF that, according to Trade Algo, have at least a 15% upside to the typical analyst price target. According to Trade Algo, the stock is rated a buy by at least 60% of the analysts that follow it.

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The biggest upside potential is offered by W.R. Berkley, at 23.1%. A buy rating is given by about 60% of the analysts who follow the stock.

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According to Trade Algo, the insurance business reported fourth-quarter operating earnings per share of $1.16 in January, above predictions of $1.10 and increasing by 14% from the previous year. This year thus far, shares are down 7.5%.

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The list included Visa and Mastercard as well. Compared to the average price objective, Visa has a 17.9% upside and Mastercard a 17.6%. When both credit card firms reported earnings in late January, they both exceeded forecasts.

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More than 70% of the analysts who follow Visa and Mastercard's shares rate them as a buy. Keybanc, which raised the names from sector weight to overweight in January, is one of the companies that is optimistic on both names. The Wall Street firm anticipates that as fintech develops into an embedded model used by issuers, customers, businesses, and merchants, the companies will profit.

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For the year, shares of Visa are up 7.6%, while those of Mastercard are up 3.9%.

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Eli Lilly is one of the four healthcare organizations that were chosen. The pharmaceutical company earlier this month announced better-than-expected profitability but a fourth-quarter revenue shortfall. Investors are closely monitoring Mounjaro, a type-2 diabetes medicine that is anticipated to experience a significant increase in sales if it is approved to treat obesity. They are becoming more worried, though, about the drug's insurance coverage, which has been slow to rise.

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Mounjaro has gotten off to a "unbelievable start," according to CEO David Ricks, who also stated that patient and physician satisfaction were "through the roof" and that volume uptake was "through the roof." The company should end this year with 50% more capacity than it began with, and additional capacity should be coming online in 2024 and 2025, he added.

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Around 64% of the analysts who follow Eli Lilly rank the company as a buy. Despite the stock's year-to-date decline of 10.2%, there is still 17.6% upside to the average price target.

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Elevance Health is another name in healthcare that is on the list. Adjusted earnings for the insurer's fourth quarter came in at $5.23 per share, above the StreetAccount forecast of $5.19. However, revenue came in at $39.67 billion as opposed to the predicted $39.77 billion, significantly below projections. Elevance Health completed the closing on the purchase of BioPlus, a speciality pharmacy, last week.

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68% of analysts who cover the stock rate the name as a buy, and the stock has a 17% upside to the average analyst price objective. This year, shares are down 3.5%.