A recession is defined as two consecutive quarters of slowing economic growth, as measured by gross domestic product (GDP) data. Over the past two years, interest rates have soared to record highs as the US government pumped billions of stimulus dollars into the economy to fight the pandemic, resulting in strong growth.
Now the Federal Reserve is raising interest rates to normal levels, which could slow the economy, and if it goes too far, it could even lead to a recession. Investment banks on Wall Street believe that the probability of such an outcome in the next 12 months is around 30-40%.
But maybe that’s too pessimistic
The stock market is very attentive to this risk. The technology sector in particular, which is represented by the Nasdaq-100 index, has fallen 28% in 2022 so far, putting it firmly in a bear market. But are investors too negative?
According to the most recent data, there are about 11.4 million job openings in the United States right now, but only 6 million people are unemployed. This implies that companies feel optimistic enough to hire more staff, and since there is not enough labor available to fill all these jobs, employees may see their income continue to increase.
On that note, households are in excellent financial shape; their net worth (assets minus liabilities) is near all-time highs and they have the highest cash balances on record. These conditions don’t usually signal an impending recession, so what should investors do if it never happens?
Here are two big stocks investors will want to own if the U.S. economy stays strong and avoids the dreaded R-word.
Apple (AAPL 1.62%) is a consumer brand par excellence. If the economy remains strong and consumers feel confident about their financial future, we can expect Apple to sell more of its expensive devices like the iPhone and its accessories, or its line of Mac computers.
And the company now offers much more than its innovative hardware products; it’s a top name in entertainment, drawing money from customers for its Apple Music platform and Apple TV+ streaming service.
These brands fall under its services segment along with Apple Pay, Apple News and iCloud, among others. It accounted for 20% of Apple’s total revenue of $97.2 billion in the recent second quarter of fiscal 2022 (ended March 26). But the story is the growth rate: Services revenue grew 17% year-over-year, compared to 7% for Apple’s product segment.
It’s been a recurring theme in recent years, in part because devices like the iPhone are used by more than 1.2 billion consumers, so it’s getting progressively harder to generate user growth. But that’s not necessarily a bad thing as the services segment is much more profitable, with a gross margin that hovers above 70% versus around 35% for products.
By the end of fiscal 2022, analysts expect Apple to have generated $393 billion in total revenue and $6.14 in earnings per share, which equates to about $100 billion in net profit. With Apple stock currently down 24% from its all-time high, now might be a good time to take a stand in the world’s biggest company.
2. Assets received
Assets received (UPST 3.79%) listed on public markets in December 2020 at $20 per share. It has since skyrocketed to an all-time high of $401, before falling back to around $32, where it trades today. Company uses artificial intelligence to lend to 57 banks and credit unions (a rapidly growing number) in an effort to compete Just Isaacdecades-old FICO credit score system.
Investors have sold off shares of Upstart in recent months as rising interest rates typically result in consumers borrowing less money, less frequently. Since the company collects fees each time it issues a loan, this could hurt its revenue, and it has already revised its 2022 guidance to $1.25 billion from $1.4 billion.
But if the economy remains strong, Upstart is very well positioned to benefit. The company’s Upstart Auto Retail sales and finance platform is now active at 525 auto dealerships across America, a number that has grown 224% in the last 12 months alone. This puts Upstart at the forefront when it comes to one of the most important purchases consumers typically make.
And the company’s primary focus is unsecured lending for a variety of purposes, including home renovations and vacations, which are more higher discretionary spending segments when consumers feel confident.
In the long term, Upstart’s annual opportunity could exceed $6 trillion. So, picking up the stock when it’s down more than 90% from its all-time high could be a good buy looking back a few years from now.