UBS has identified a trend where the stock market is increasingly driven by a few large tech companies, resulting in lower correlations among broader stocks. Analyst Sean Burns pointed out that many defensive stocks are now trading at attractive valuations, with the gap between expensive and cheap defensive names at its widest since 1990.
He noted that low-risk stocks currently offer a market-implied yield of 4.4%, compared to 1.4% for high-risk stocks, suggesting that investors could see positive returns from these low-volatility investments. UBS is focusing on stocks with a market cap of at least $5 billion and a low beta relative to the S&P 500, which indicates they are less volatile.
Among the recommended stocks are PepsiCo, which has a 4.37% dividend yield and is down about 6% year-to-date, and McDonald's, yielding 2.75% with a 12% decline this year. Both companies have received favorable analyst ratings and are expected to perform well in their respective markets.
Other stocks mentioned include Waste Management and Willis Towers Watson, both of which also have strong upside potential according to analyst targets. Overall, UBS's analysis suggests that now may be a good time for investors to consider defensive stocks that pay dividends, as they could offer stability and growth in a volatile market