UBS likes these defensive plays – which also happen to offer solid dividends

UBS advises investors to increase exposure to defensive stocks amid concerns of a slowing U.S. economy, weakening economic data, and a rising recession probability, despite the S&P 500's recent recovery; the firm highlights Johnson & Johnson and PepsiCo, noting their strong balance sheets, dividend yields of 3.4% and 4.4% respectively, and potential for price appreciation.

Analysis

Despite the S&P 500's recovery from its April lows, UBS Global Equity Strategist Andrew Garthwaite advises a cautious stance, recommending an increased allocation to defensive stocks due to mounting economic uncertainties. UBS forecasts a deceleration in U.S. GDP growth from 2.1% YoY in Q1 to 0.9% in Q4, alongside sharply weakening soft economic data and a downturn in hard data, contributing to a 37% recession probability within the next 12 months. Compounding these concerns are a U.S. budget deficit that reached $316 billion in May, bringing the year-to-date total to $1.36 trillion, unresolved U.S.-China trade policy, and ambiguity surrounding the Federal Reserve's future interest rate path. Garthwaite notes that cyclical stocks appear expensive relative to defensive names on price-to-earnings and price-to-book metrics, favoring defensive companies with low leverage to mitigate risks from potentially higher bond yields. Illustrative examples include Johnson & Johnson (JNJ), which is up over 7% in 2025 with a 3.4% dividend yield and a Goldman Sachs price target of $176, citing its stable growth, strong balance sheet, and robust drug pipeline. PepsiCo (PEP), despite a nearly 15% share price decline in 2025, offers a 4.4% dividend yield, recently increased its quarterly dividend by 5%, and completed the $1.95 billion acquisition of Poppi; LSEG consensus targets suggest almost 15% upside. Other buy-rated dividend payers highlighted by UBS include Merck, Elevance Health, and Cigna. The overall market sentiment is moderately negative and cautious, reflecting these underlying concerns.

Key Decisions for Investors

• Investors should consider rebalancing portfolios towards defensive, low-leverage, dividend-paying equities in light of UBS's forecast for slowing U.S. GDP, rising recession probability, and the current valuation disparity between cyclical and defensive stocks.
• Examine specific defensive recommendations such as Johnson & Johnson, noting its 3.4% dividend yield and Goldman Sachs' positive outlook, and PepsiCo, with its 4.4% yield and recent dividend increase, while also considering their respective recent share price performance and analyst consensus for potential entry points.
• Closely monitor upcoming U.S. economic data releases (GDP, inflation), Federal Reserve interest rate decisions, developments in U.S.-China trade relations, and U.S. fiscal policy, as these factors are highlighted as significant drivers of market uncertainty and potential catalysts for volatility.