Safety in the Stock Market Is Getting Expensive

General Mills posted disappointing earnings and missed earnings forecasts, but its shares are up nearly 19% this year. Photo: Luke Sharrett/Bloomberg News

Yields on the 10-year Treasury note fell below two-year yields for the first time since 2007 on Wednesday, sparking more than 2% declines in the S&P 500 and Dow Jones Industrial Average and sending investors toward safe-haven stocks.

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 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, 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 -0.86% , General Mills Inc. GIS -0.64% 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 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 19% 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

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8