Bank of America believes we're already in a recession — and says these stocks have what it takes to beat it

Published Wed, Jul 20 20228:00 PM EDT

Will the U.S enter a recession? Wall Street may be deeply divided on that, but Bank of America believes the economy is already in one. The investment bank reveals how to trade the downturn, naming several stocks with attributes that have worked in past recessions. The bank believes the U.S is in a "mild" recession "starting now," and expects the economy to register negative quarter-on-quarter gross domestic product growth from 1Q2022 to 1Q2023. Against this backdrop, the bank is doubling down on its preference for small-cap stocks to navigate the macro challenges plaguing the economy. "We think [small cap] risks are largely discounted, and small caps are better positioned to weather today's backdrop of higher-for-longer inflation, deglobalization, risks to Covid beneficiaries (big Growth stocks), and geopolitical risks," Bank of America's strategists, led by Jill Carey Hall, said on July 15. Small-cap stocks have historically performed better than larger-cap ones in a stagflationary environment, he added, noting also that guidance from small-cap companies is also "above average and improving." Bank of America's research indicated that the small-cap-focused Russell 2000 Index 's recent 32% peak-to-trough decline already represents more than 80% of the index's average decline in past recessions — which implies limited further downside for the segment. The bank's research also showed that the index looks oversold in price-to-earnings (P/E) terms compared with prior recessions. On a P/E basis, It expects further downside of 5% to 15% for the Russell 2000, compared with 15% to 20% for the broad-based S & P 500 . Read more Morgan Stanley says these global stocks are set for earnings beats — and gives one over 45% upside These 'top of the food chain' stocks are the best names you can buy, says one analyst Morningstar reveals cheap stocks in the 'overvalued' oil sector — and says one is 'a bargain' Stock picks But Bank of America also cautioned investors to be selective on small-caps. The bank screened the Russell 2000 and Russell Midcap Index to identify stocks with specific attributes that outperformed in past recessions: high quality, low risk and a track record of returning cash to shareholders. Stocks that made the bank's screen include auto parts retailer O'Reilly Automotive , Hershey , Ohio-based health-care company Chemed Corp , electronic components manufacturer Amphenol Corp and packaging manufacturer Avery Dennison .