Recession odds have been soaring this past week due to tariff drama and a slowdown in AI companies. Most tech companies have been busy branding themselves as AI companies, and the recent bout of bearishness about AI has taken the tech-laden Nasdaq near correction territory.
The Atlanta Fed estimated that the U.S. GDP will contract by 2.8% in Q1. Moreover, The Wall Street Journal ran a report today saying the recession trade is back on Wall Street.
Now, most stocks contract during a recession, and there aren’t any true “safe havens.” However, a recession isn’t guaranteed to happen, and there have been plenty of examples of the market bouncing back and proving the bears wrong despite significant fears.
In the meantime, investors could pile into defensive names. Like in 2022, we could see these defensive stocks trade at much higher valuations. They are currently quite cheap, so buying into them before a potential recession seems worth it. Here are three to look into.
PepsiCo (NASDAQ:PEP) is one of the first stocks that pops into your mind when you start thinking about defensive stocks. The company’s products are all over the snacks aisle, and demand is sticky regardless of the economy.
However, this has gone both ways for PEP stock. The stock delivered solid gains up until early 2023 as investors increasingly bought defensive names but have since declined nearly 22% from its May 2023 prices as the AI rally accelerated and investors went after hotter names.
The stock now looks like a great buy before any possible recession. The downside risk from here is quite low, and if Wall Street gets more nervous in the coming months, the stock could start a recovery rally.
PEP also comes with a forward dividend yield of 3.54% and has 53 years of consecutive dividend hikes under its hood.
The consensus price target of $172.35 implies 12.6% upside.
Colgate-Palmolive (NYSE:CL) also sits at correction levels and looks increasingly appealing. it is a no-brainer defensive stock Wall Street could rotate gains into if things turn more sour. The stock is up 7% in the past month since some investors have already started doing that.
Historically, It has been resilient during previous downturns as people are unlikely to cut back on toothpaste. During the 2008 financial crisis, Colgate-Palmolive's stock outperformed the market on the way down, and the recovery was fairly quick compared to most other companies.
Revenue continued to increase in 2008 and didn’t decline. While analysts expect sales growth at just 0.02% in 2025, it is expected to increase to about 4% annual growth from next year through 2030.
You’re paying almost 25 times earnings, but investors have paid a lot more for this stock during downturns simply due to the safety it offers.
The shareholder yield is at nearly 5%, and the dividend yield of 2.2% is in line with most of its peers.
The consensus price target of $101.61 also implies 10% upside.
McDonald’s (NYSE:MCD) was one of the only companies that not only held steady in 2008 but actually delivered solid gains. A Forbes title in 2009 pointed out that McDonald’s “loves your recession.” It’s hard to say if the company will thrive in a 2025 recession, but there’s a good chance it will.
It has the pricing power to lower prices and have even more people returning to its restaurants during downturns. The company’s $5 meal deal is still available in 2025, and it was very successful in 2024. This is now a part of its McValue meal launched nationwide earlier this year. The value strategy here could make it a winner in a future recession. The company has a net margin of 31.6% despite these low prices.
It has a 3-year share buyback ratio of 1.3%, which is better than almost 90% of companies in the restaurant industry. You’re getting a 2.24% dividend yield on top of that.
The consensus price target of $323.6 implies just 4.8% upside, but the downside risk is pretty low.
