Safety in the Stock Market Is Getting Expensive

Yields on the 10-year Treasury note fell below two-year yields for the first time since 2007 on Wednesday, sparking a nearly 3% decline in the S&P 500 and sending investors toward safe-haven stocks early during the selloff.

Shares of utilities broadly rose 0.2% Wednesday morning, while a handful of real-estate and consumer-staple stocks notched small gains after investors got one of the strongest signals yet a recession could be imminent. Those stocks ended up reversing their gains as Wednesday’s selloff intensified, however the declines were less severe than what the broader market suffered.

That is because those companies have long been viewed as ports in a storm since they are considered reliable profit generators that offer a guaranteed stream of income in the form of dividends.

But if the economy truly falters, investors may find those stocks provide little cover over the long term, some analysts said.

“Their earnings stability has fallen off dramatically,” said

Brian Belski,

chief investment strategist at BMO Capital Markets. “Are millennials eating Cheerios or using their cellphone? They’re eating less of those and they’re on Google looking how to get somewhere.”

Take consumer staples. Earnings growth among

Procter & Gamble
Co.

,

Coca-Cola
Co.

,

Colgate-Palmolive
Co.


CL -1.63%

,

General Mills
Inc.


GIS -1.12%

and

Mondelez International
Inc.

has become more volatile over the past five years, as those companies cope with pricing pressures weighing on profit margins and waning demand for some of their products, said Mr. Belski.

Still those stocks are up double-digit percentage points this year despite some reporting lackluster results. General Mills, for example, missed analysts’ sales estimates and earnings, before adjustments, and also fell short of forecasts due in part to sluggish sales of its snack bars and cereals. Still, shares are up nearly 17% this year, as investors have gravitated toward traditionally safe stocks.

The gains across those sectors pushed price-to-earnings ratios, a useful tool for measuring valuations, well above where the broader S&P 500 index trades. Consumer staples, utilities and real-estate stocks all carry forward-looking price-to-earnings ratios of at least 19 times, versus the S&P 500’s 16.7 times, near their highest valuations since early 2018.

Mr. Belski said investors may be better off defining a new group of safety stocks, including companies like

Apple
Inc.

and

Netflix
Inc.,

both of which have shown greater earnings stability in recent years.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

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