• Investors worried about a market correction should adjust their portfolios, David Rosenberg says.

• The top economist has warned stocks are in a bubble and at risk of a major decline.

• He advised investors to pay attention to key sectors and add “insurance” to their portfolios.

A number of Wall Street forecasters have been warning of a stock bubble as the market climbs to a series of fresh highs in 2024 — and investors worried about such a scenario should be putting their money in a handful of assets to protect themselves from the eventual bursting.

That’s according to David Rosenberg, a top economist and the founder of Rosenberg Research, who’s been warning of a potential craash in stocks for months. In the past, he’s warned of a 39% correction to stocks, among the more extreme predictions on Wall Street, where most investors are feeling optimistic about a soft landing amid a robust economy and easing interest rates.

“Watching the market these days is like watching a clown blowing up a balloon (or Chuck Prince dancing the ballroom), knowing the inevitable,” Rosenberg said in a note to clients on Friday. “When this mega-bubble pops, it will be spectacular.”

Investors need to exercise caution and avoid following the “herd mentality,” Rosenberg said, pointing to the fervor for mega-cap tech stocks. Instead, he said, investors should focus on stocks with strong business models, strong growth, and good prices, and add some “insurance” to their portfolios.

Below are his top investment ideas for to prepare for the potential bursting of a market bubble.

Healthcare and consumer staples

Investors should gear their investments towards what people will always need in the future. In particular, Rosenberg recommended that investors pay attention to options in the healtcare and consumer staples sectors.

“Focus on where people are going to focus on what they need, not what they want,” Rosenberg wrote. “Anything related to e- commerce, cloud services, and wiring up your home to become your new office has been in a budding secular growth phase.”

Utilities

Utility stocks also look promising. Other forecasters have predicted huge upside for utility firms, due to the growing need for power and data centers stemming from the AI boom.

“Utilities, as we have been saying for a long time, are as close to a ‘no brainer’ as there is, given their yield attributes and their being re-rated for ‘defensive growth’ owing to enhanced earnings visibility through the strong and secular outlook for US power needs,” Rosenberg said.

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Aerospace, Defense

Aerospace and defense stocks could also be a buy, he added, given rising geopolitical tensions around the world.

“Aerospace/defense has been a long-standing bull call for us for several years, and the best hedge against an increasingly troubled world where military budgets are expanding everywhere — and not at all sensitive to who comes to power on November 5th.”

Big tech

While some areas of tech are exhibiting bubble characteristics, investors could still seize on opportunities in some large-cap tech names, given the prevalence of work-from-home, cloud services, and remote work, Rosenberg said. Still, investors should wait to scoop up tech names at better prices, he said.

“I’d prefer to pick these plays up at better prices than we have today because this last melt-up has eaten enough into future expected returns to keep us cautious for now. But we would be an avid buyer on any significant pullback.”

Safe bets

Investors should look to put a “dose of insurance” in their portfolios. That means gold — the “truest store of value,” Rosenberg says, — as well as government bonds.

“The beautiful thing about gold is that it is not a liability that a central bank can simply have forgiven or a currency that can simply be printed by government fiat,” he said of the precious metal. “I also favor the Treasury market because it commands just about the highest yield of any major industrial country – and with the great liquidity attributes.”

Real estate investment trusts could also be good ways to hedge risk, Rosenberg said. That particularly applies to REITs tied to the industrial and healthcare sectors.

“In any event, we all have to become increasingly thematic and thoughtful in our decision-making and more selective than normal because the stock market, and financial assets in general, have become nothing more than a momentum casino,” he added.

Most forecasters on Wall Street still expect a strong performance from equities into year-end and 2025. Goldman Sachs, UBS, BMO, and Deutsche Bank have raised their year-end price targets for the S&P 500 in recent weeks, with new forecasts ranging from 5,750 to 6,400.

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