There are no crystal balls in investing. But if interest rates stay higher for longer and the economy sputters next year, there is one group of stocks that could shine.
The firm has a cautious outlook over the next six to 12 months. Senyek said inflation will be more persistent than consensus estimates suggest, giving the Federal Reserve reason to keep interest rates higher than investors had expected, and hold them there for longer. The yield on 10-year U.S. government debt will rise above 5% again before year-end, and economic growth will be sluggish, Wolfe expects.
Although the futures market is pricing in reductions starting in May, it is even possible that the Fed could raise rates again, building on the 11 increases that have taken the bank’s target for the fed-funds rate from near zero to 5.25%-5.50% since March 2022, he said. “If inflation proves to be sticky and the economy proves to be resilient, then the Fed could end up having to hike again sometime next year, but our base case is they’re done for now,” Senyek said.
To further narrow down the list, he advised looking for companies with free-cash-flow yields of 4% or more. The metric—a company’s free cash flow divided by its market capitalization—indicates how investors are valuing the company’s cash production. A high free-cash-flow yield usually means a company is in good shape to maintain or increase its dividend or ramp up capital investments.
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