Sometimes there’s a clear economic narrative that can help steer investors through the stock-picking process. In 2021 the guiding story was the stimulus-infused post-COVID rebound. In 2022 it was an inflationary hangover that brought back memories of the 1980s.
As for 2023, well, let’s just say it has stumped the storytellers. A year ago there was near consensus that the Federal Reserve’s inflation-fighting interest rate hikes would spark a recession in the U.S., but it didn’t turn out that way—or at least it hasn’t yet.
After that head fake, Wall Street’s top minds are unusually divided about what’s coming for the economy, and by extension the stock market. The uncertain impact of higher-for-longer interest rates, the AI boom, and rising geopolitical tensions has led to some wildly divergent outlooks among forecasters—from Deutsche Bank’s prediction of a major recession to Goldman Sachs’ view that an economic reacceleration lies ahead, driven by a still-strong job market.
It’s the kind of environment where stock investors often benefit from playing defense and offense simultaneously. On one hand, investors should look to hold companies that have strong balance sheets, steady cash flows, low debt levels, and the ability to maintain pricing power—the defensive qualities that help companies do well when inflation or high interest rates exert a drag on the broader economy. At the same time, they shouldn’t ignore firms that are aligned with long-term trends that could generate outsize growth in the future. (And yes, the adoption of AI is one of those trends.)
With this backdrop in mind, Fortune asked seven of Wall Street’s most well-respected investors and analysts for their top stock picks for 2024. The diverse mix of companies they mentioned range from sturdy, predictable consumer-staples plays to bets on a new technological revolution. In a time of uncertainty, these picks should provide a mix of safety and opportunity, no matter what happens in the broader economy.
Leaning into AI
AI may be the most important technological advance of our lifetimes—one that Wall Street analysts have already compared to the internet, the automobile, and even electrification. But while there’s broad consensus that AI will eventually revolutionize the economy and boost corporate earnings, the timing and depth of those revolutionary and profitable changes are a subject of hot debate. Some bears argue that where the stock market is concerned, AI hype has run too far ahead of reality—setting up a few richly valued stocks for a tumble if the economy slows.
Dan Ives, a senior equity analyst at Wedbush Securities, thinks the AI pessimists risk missing out. “The bears try to look smart while the bulls make money,” he comments. Ives believes investors should be “macro-aware, but micro-focused” in 2024. That means understanding the risks to the economy but not missing out on big opportunities from the technological revolution that is AI.
Two AI-linked stocks came up time and again among our investors: Microsoft, which has leaped into the lead in the AI arms race thanks to its partnership with OpenAI, the maker of ChatGPT, and semiconductor maker Nvidia, whose graphics processing units (GPUs) are pivotal components of the AI revolution. Each has already seen its stock soar on the back of AI enthusiasm—but bulls agree there are more gains ahead.
Mark Baribeau, head of global equity at Jennison Associates, which manages $175 billion in assets, calls Nvidia his top stock for 2024. He highlighted the company’s impressive margins, strong revenue growth, and dominant position in GPUs, which are critical pieces of hardware in training AI systems. “With generative artificial intelligence, we’re entering the fourth era of computing. And the most important company in the fourth era of computing will be Nvidia,” Baribeau says.
Jennison has a nearly 1% stake in Nvidia, and its faith has paid off in 2023, with the stock surging 238% through mid-November. But Baribeau believes Nvidia remains undervalued, noting that it trades at about 25 times its estimated fiscal 2025 earnings—below its five-year historical price-to-earnings average.
“With generative artificial intelligence, we’re entering the fourth era of computing. And the most important company in the fourth era of computing will be Nvidia.”
Mark Baribeau, head of global equity at Jennison Associates
Jay Hatfield, founder and CEO of Infrastructure Capital Management, an investment firm and active ETF manager, also calls Nvidia his favorite stock for 2024. Hatfield argues that investors should play the AI revolution in a way that would have proved successful at other periods of great technological change—by buying industry leaders that are already turning the new technology into meaningful revenue. “It was a great idea to buy internet stocks,” he says. “But it really worked if you went after the most established companies with the clearest avenues for success.” Nvidia, he says, is one such company.
If Nvidia is an AI hardware play, Microsoft is an opportunity to benefit from the immense growth in cloud computing that AI is catalyzing. “Redmond is gaining more and more cloud market share,” Ives says, referring to Microsoft’s headquarters. Wedbush believes AI workloads alone could increase Microsoft’s Azure cloud revenue by 20% or 25% over the next two or three years.
Richard Saperstein, founding principal and chief investment officer of Treasury Partners, is another Microsoft believer. He cites the firm’s diverse mix of businesses (from software to LinkedIn) as a key strength, as well as its strong free cash flow and its $143 billion pile of cash.
Ever the tech bull, Saperstein also likes a competing Big Tech giant—Google’s parent company, Alphabet. Microsoft and OpenAI, with ChatGPT, have certainly generated more buzz than Google and Bard, but the broader contest is anything but over. “The race to monetize AI, it’s in the early innings,” he says. “I wouldn’t write [Alphabet] off so quickly.” Saperstein believes Alphabet is trading at an attractive valuation, after a recent selloff owing to worse-than-forecasted cloud growth numbers. He also points to the roughly $100 billion that Alphabet has spent on research and development, including on AI, over the past four years—investments that he believes are bound to pay dividends.
Big Tech players aren’t the only options for betting on an AI surge. Tom Lee, cofounder and head of research at investment research firm Fundstrat Global Advisors, dubs the electronic design automation (EDA) firm Cadence Design Systems his top pick for 2024. Cadence’s design software plays a key role in the design and development of the critical semiconductors that have made AI a reality—indeed, Nvidia is one of its main customers.
The company expects total revenue of just over $4 billion in fiscal year 2023, but its place in the AI supply chain had earned it a market cap of $74 billion as of mid-November. Lee argues that the firm is in a “unique” and “dominant” position in EDA and chip-design markets in which there are few other competitors. Underscoring his point: The type of software that Cadence offers is so critical for semiconductor firms that the U.S. Department of Commerce enacted export controls on it last year, in an effort to prevent China from creating cutting-edge semiconductors.
Among companies that create more general AI software applications, Ives calls data analytics firm Palantir Technologies the “purest-play AI name in the market” today. Denver-based Palantir expects 2023 revenues of roughly $2.2 billion and had a market cap of $43 billion in mid-November. After operating for years as a secretive but much-hyped startup, Palantir has found a groove as a publicly traded company: It has been profitable for four consecutive quarters and has no long-term debt. And Ives notes that the company, whose AI software customers include U.S. and Israeli intelligence agencies, is likely to increase its revenues in an era of rising global tensions. “In this geopolitical storm, clearly, it’s a company that will benefit,” he said.
Recession-resistant names
This fall the Federal Reserve sent a host of signals that its fight against inflation might be close to an end. But even if rates don’t climb further, some forecasters believe a recession is inevitable because of the impact of higher-for-longer rates.
Eli Salzmann, portfolio manager of U.S. large-cap value strategies at Neuberger Berman, a firm that oversees over $435 billion in assets, is one of those bears. In fact, he believes “we are entering a recession as we speak … It’s not going to be pretty over the next six to 12 months, especially the corresponding effect on the markets.” Salzmann’s advice to investors: Look to more defensive stocks, including the consumer staples giant Procter & Gamble and the diversified health care products leader Johnson & Johnson.
He highlights Procter & Gamble’s strong pricing power, solid free cash flow, and low ratio of debt to earnings. Most important, he notes that the company’s revenues tend to be resilient during recessions. “When times get tough, you’re still going to brush your teeth with their toothpaste and you’re still going to wash your clothes with their laundry detergent,” he says. Procter & Gamble has also spent years reinvesting in its brands to regain market share in key consumer categories including beauty and oral care, and Salzmann says the company is primed to “slowly get repaid for that investment.”
“When times get tough, you’re still going to brush your teeth with their toothpaste and you’re still going to wash your clothes with their laundry detergent.”
Eli Salzmann, portfolio manager of U.S. large-cap value strategies at Neuberger Berman
Salzmann notes that pharmaceutical companies also tend to outperform in times of economic uncertainty, and for similar reasons: Consumers and doctors won’t stop taking and prescribing medications just because the economy is shaky. With Johnson & Johnson, the main draw is the firm’s robust pipeline of drugs under development. “It’s pretty exciting,” Salzmann says. “There is serious multibillion-dollar annual sales potential from some of these drugs.” He points to positive outlooks for Johnson & Johnson’s new treatments for multiple myeloma, psoriasis, and inflammatory bowel disease.
Some insurance companies also generate stable revenues in recessionary times. Haruki Toyama, head of the large-cap and midcap equity team at Madison Investments, pointed to the global property and casualty insurance company Arch Capital Group as his top pick for 2024. Arch isn’t a household name, but it does business in North America, Europe, and Australia, and its offerings include energy, marine, and aviation insurance, as well as specialty services for travel and commercial surety products that protect against fraud or theft. The company grew its revenues 36% year over year in the third quarter and is on track to generate about $13 billion in revenue in 2023.
Arch is “the best managed insurer in the world,” according to Toyama, who points to the firm’s diversification and its track record of quickly pivoting to emphasize the most profitable types of coverage. It also trades at just 11 times earnings, and “it’s not really that correlated to the general economy,” Toyama says. “It’s sort of like a subscription business … So it’s very steady.”
The case for oil and gas
Russia’s invasion of Ukraine disrupted the world’s energy supplies, and many economists fear that the escalating Israel-Hamas conflict and rising geopolitical tensions between the U.S. and China could soon do the same. Those hotspots are already a factor in today’s elevated oil prices, but growing conflict could mean even greater price increases. Even without the geopolitical tensions, there has been a lack of investment in oil and natural gas production for years, owing in part to the green energy transition and to investors’ demands that energy companies return more profits to shareholders. The International Energy Agency warned in September that, as a result, oil supplies “will be at uncomfortably low levels” in 2024.
Energy-sector stocks offer investors some protection from energy-related economic shocks. Fundstrat’s Lee believes that against this backdrop, the oil and gas giant Exxon Mobil offers upside next year. “I think there is going to always be upward pressure on price,” Lee says. “And I think companies like Exxon are really well positioned to capture a lot of that upside.”
Lee notes that Exxon was trading this fall at a very appealing valuation of just 10 times earnings. In a worst-case scenario where the economy struggles badly enough to hurt oil and gas consumption, Exxon will provide income for investors: It currently pays a 3.6% dividend. It also generated $11.7 billion in free cash flow in the third quarter alone, which means it has the resources available to invest in its growth and buy back shares.
Hatfield of Infrastructure Capital Management highlights Kinder Morgan as another firm that should benefit as global instability makes U.S. domestic energy production increasingly important. The energy infrastructure company owns 82,000 miles of oil and natural gas pipelines and 140 natural gas terminals, and has 700 billion cubic feet of operated natural gas storage capacity in North America.
Kinder Morgan also transports a little less than half of all U.S. liquefied natural gas (LNG) through its pipelines, and it’s likely to benefit from the ongoing boom in LNG exports. The IEA estimates that the U.S. share of global LNG exports will grow from 20% in 2022 to almost 30% by 2026. To meet these needs, U.S.-based producers will likely need to use the pipelines and export terminals that Kinder Morgan operates, executive chairman Rich Kinder explained in a recent earnings call.
Kinder Morgan’s stock has struggled in 2023—falling 10% between January and the end of September—after natural gas prices retreated from last year’s Ukraine war-induced highs, but Hatfield believes investors are missing the bigger picture. “We don’t think that people have appreciated that the U.S. is the Saudi Arabia of natural gas. We are going to continue to need to transport and export more and more of it. And Kinder Morgan will take advantage of that,” he says. Kinder Morgan trades at just 15 times forward earnings, has steady cash flows, and offers a sizable 6.7% dividend yield.
Finding growth outside the U.S.
Since the end of the pandemic, the U.S. economy and its stock indexes have outpaced most of the rest of the developed world. But Baribeau of Jennison Associates argues that investors can also find companies abroad that offer steady, stable growth.
He points to the Argentinean e-commerce giant MercadoLibre as one option, calling it the “Amazon of Latin America.” The company is benefiting from the ongoing digital transformation in South and Central America, Baribeau says. MercadoLibre’s e-commerce business has been a fast grower for years; in the third quarter, its income from operations jumped 131% year over year to $685 million, a new quarterly record.
MercadoLibre, whose stock trades on the Nasdaq exchange, has also leaned into fintech, creating a digital payments platform called Mercado Pago that’s akin to Venmo but also offers payment processing for businesses. “They had to create a digital payments mechanism to help underbanked populations actually buy things online,” Baribeau explains. “That financial technology platform has now morphed into a significant generator of wealth creation for the company.” Mercado Pago had roughly 50 million active users as of the end of the third quarter, up from under 20 million in 2020. The company’s leaders say that it’s gaining market share from competitors as well, particularly in Mexico and Brazil.
Baribeau also highlights Hermès, the 185-year-old French luxury goods manufacturer, as a top pick for 2024. He noted that the company has great brand recognition and boasts a direct-to-consumer business model that provides a unique level of pricing power. “You can only buy their product from them on their website,” Baribeau says. “Even if you find them in a high-end department store, [Hermès is] going to control that inventory.” Tight inventory controls allow Hermès to avoid mismatches in supply and demand that could pressure the company to sell goods at a discount. The company can also rely on a base of high-net-worth customers who are inflation- and recession-proof compared with the average consumer. “Their clientele is more likely to weather any storm,” he says.
A contrarian bet on office space
As Berkshire Hathaway’s Warren Buffett famously said during the depths of the Great Recession of 2008, sometimes it pays to be greedy when others are fearful. For Hatfield of Infrastructure Capital Management, this could be a good time for some investors to take advantage of the fear in the beaten down commercial real estate (CRE) sector. Rising interest rates and the work-from-home trend combined to pummel this sector over the past year, but the selloff could be overdone in some quality names.
Hatfield highlights the real estate investment trust (REIT) Boston Properties, which owns and develops luxury residential, retail, and office properties in major cities including Boston, Los Angeles, New York City, and Washington, D.C. The REIT owns 190 properties, from the Salesforce Tower in San Francisco to the Prudential Center in Boston, that together encompass 53.5 million square feet and generated more than $3.1 billion in revenue in 2022.
For the year through mid-November, shares in the trust were down almost 30%, leading it to trade at just 7.5 times its funds from operations (FFO)—a metric commonly used to value REITs—and pushing its dividend yield over 7%. (Yields rise as a percentage of share price when a stock’s price falls.) Still, according to Hatfield, Boston Properties could benefit from a boom in demand for office space from AI developers, future interest rate cuts, and the attenuation of the WFH trend. “We think people are hating on offices way too much, particularly in the major markets,” Hatfield says. “We don’t think investors are distinguishing between the highest- and lowest-quality companies.”
Indeed, there’s a takeaway here that investors can apply to the markets in general in 2024: When uncertain times drive stock prices down, they sometimes turn good companies into bargains.
Picks from the experts
Microsoft (MSFT, $370)
Nvidia (NVDA, $497)
Alphabet (GOOGL, $134)
Cadence Design Systems (CDNS, $273)
Palantir Technologies (PLTR, $20)
Procter & Gamble (PG, $152)
Johnson & Johnson (JNJ, $148)
Arch Capital Group (ACGL, $86)
Exxon Mobil (XOM, $104)
Kinder Morgan (KMI, $17)
MercadoLibre (MELI, $1,431)
Hermès (HESAY, $208)
Boston Properties (BXP, $57)
Prices as of 11/14/23
How Fortune did
In a year when stock markets treaded water, Fortune’s picks swam a bit faster. Our “11 recession-resistant stocks to buy for 2023” delivered a median return of 7.9% over the past 12 months, about half a percentage point better than the S&P 500. Here’s what worked and what didn’t. —Matt Heimer
Thanks, ChatGPT!
Our top performer was Microsoft, returning 41%. Excitement about generative AI was a huge tailwind: Microsoft is the main investor in and partner of OpenAI, the maker of chatbot ChatGPT. Its Azure cloud and Copilot productivity tools, both of which are AI-powered, enjoyed huge revenue gains. We’re betting the ride continues.
Paying dividends
Dividend payouts helped some picks post impressive numbers. Investors in retailer TJX (up 14%) and waste management firm Republic Services (up 12.5%) got a meaningful boost from dividends. And Procter & Gamble (up 8%) trailed the broader market on share price appreciation—but beat the S&P 500 overall thanks to its hefty yield.
Spoiled food
Two food-related picks gave us indigestion. Inflation squeezed food distributor Sysco, by increasing its costs and hurting business for its restaurant customers; its shares lost 20%. Similar forces hurt Philippines-based food and beverage company Universal Robina (down 14%). Still, both companies stayed profitable and paid big dividends.
A version of this article appears in the December 2023/January 2024 issue of Fortune with the headline, "13 stocks to buy for 2024."
