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Morgan Stanley expects the S&P 500 to plunge another 17%-27% within the next four months — use these 3 top recession-resistant stocks for protection

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If you think the stock market selloff has come to an end, Morgan Stanley has some bad news.

The S&P 500 is already down 14% year to date, but the Wall Street juggernaut believes the market has yet to hit a bottom.

“Our ’22/’23/’24 base case estimates are now 3%/13%/14% below consensus, respectively,” a team of Morgan Stanley analysts led by Mike Wilson write in a recent note to investors. “In our base case, 2023 now marks a modest earnings contraction (-3% year-over-year growth), though we do not embed an economic recession in this scenario.”

“While acknowledging the poor performance in equities year-to-date, we do not think the bear market is over if our earnings forecasts are correct.”

The analysts expect the S&P 500 to fall to 3,400 by year-end. And if a recession hits the economy, they say the benchmark index could drop to 3,000.

Considering that the S&P 500 sits at around 4,107 right now, Morgan Stanley’s projection implies a further downside of 17% to 27%.

That doesn’t mean selling everything. The Wall Street firm still sees upside in quite a few companies. Here’s a look at three that it finds particularly attractive.

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Eli Lilly (LLY)

This American pharmaceutical giant commands around $300 billion in market cap, with products marketed in 120 countries around the world.

Despite the market downturn this year, Eli Lilly is not a beaten-down stock.

In the first six months of 2022, Eli Lilly’s revenue grew 6% year over year. Meanwhile, the company’s adjusted earnings per share improved 12% from a year ago.

Shares are actually up roughly 16% so far in 2022, and Morgan Stanley expects the trend to continue.

On Sept. 7, analyst Terence Flynn reiterated an ‘overweight’ rating on Eli Lilly while raising his price target from $395 to $412.

Considering that Eli Lilly shares trade at around $317 apiece right now, the new price target implies a potential upside of 30%.

Welltower (WELL)

Welltower is in the real estate business.

The company doesn’t own fancy shopping malls or posh office buildings. Instead, it focuses on health care infrastructure and provides real estate capital to senior housing operators, post-acute care providers and health systems.

In Q2, Welltower’s revenue grew 29.1% year over year to $1.47 billion. Its same-store net operating income rose 8.7%.

Health care is a recession-resistant sector, so health care-anchored real estate is typically in high demand.

The company also benefits from a major demographic tailwind: population aging.

Morgan Stanley analyst Ronald Kamdem notes that the population aged 75 and older is expected to grow by 4% annually through 2030, which could serve as a catalyst for Welltower’s business.

Kamdem has an ‘overweight’ rating on the company and a price target of $90 — implying a potential upside of 15%.

Exxon Mobil (XOM)

Thanks to strong oil prices, energy stocks have turned out to be some of the best performers of the S&P 500 so far this year.

Exxon Mobil, for instance, is up 53% year to date — and that’s after a strong rally in 2021.

The oil-producing giant gushes profits and cash flow in this commodity price environment. In the first six months of 2022, Exxon earned $23.3 billion in profits, a huge increase from the $7.4 billion in the year-ago period. Free cash flow totaled $27.7 billion for the first half, compared to $13.8 billion in the same period last year.

Solid financials allow the company to return cash to investors. Exxon pays quarterly dividends of 88 cents per share, translating to an annual yield of 3.6%.

Morgan Stanley analyst Devin McDermott has an ‘overweight’ rating on Exxon and recently raised his price target to $113 — roughly 16% above the current levels.

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