The financial markets are heavily influenced by what is known as forward guidance, a term that refers to the outlook companies provide regarding their expected future performance. Typically, if a firm issues warnings about potentially lower profit margins, the immediate reaction from investors tends to be negative, leading to a decline in stock prices. While this pattern may result in a market-wide downturn, there may be hope on the horizon. According to Dan Kemp, the Chief Research and Investment Officer at Morningstar, much of a company's value is essentially tied to its future prospects. He emphasizes that any immediate impacts on a company's real value are likely to be subdued. In fact, he points out that a widening gap between current stock prices and anticipated future values can create fertile ground for savvy investors looking for opportunities.

As we enter the Q1 2025 earnings season, Morningstar has indicated that investors should brace themselves for an unusual level of scrutiny concerning companies outlooks. This heightened focus comes amid ongoing uncertainty related to tariffs, which may compel firms to provide weaker, overly cautious, or even no guidance at all. Tariffs affect corporate profitability in various ways, both directly and indirectly. For instance, increased import costs contribute to tightening profit margins. While some companies may opt to mitigate this pressure by raising prices for consumers, others may choose to absorb these costs instead, illustrating the diverse strategies businesses could adopt in response to such external pressures.

Morningstar, citing data from FactSets consensus estimates, informs us that analysts are projecting a 6.8% growth in earnings for companies in the S&P 500 index for Q1 2025. Looking beyond the first quarter, the outlook remains optimistic, with analysts forecasting an anticipated growth of 11.2% for the entire year.

In a broader context, Goldman Sachs has noted that global equities have been fluctuating in and out of bear market territory, which is defined as a 20% decline from recent market peaks. Peter Oppenheimer, the Chief Global Equity Strategist at Goldman Sachs Research, suggests that historical trends surrounding bear markets can offer valuable insights regarding both the duration and severity of these downturns. Following an announcement by former President Trump regarding a 90-day pause on additional country-specific tariffs, U.S. stocks experienced a significant uptick. However, Oppenheimer warns that a sustained market rebound is not yet established, noting that stock valuations may need to undergo further adjustments before equities can confidently transition into what he describes as the hope phase of the next market cycle.

Recently, we unveiled an insightful list of the 15 Best Large-Cap Value Stocks to Consider as the recession looms. This article will specifically analyze where Merck & Co., Inc. (NYSE: MRK) stands among these top large-cap value stocks amid the economic downturn.

Christian Mueller-Glissmann, who heads asset allocation research in portfolio strategy at Goldman Sachs, advises investors to contemplate diversifying their portfolios both regionally and across different investment styles. In particular, he recommends focusing on low-volatility stocks, which are typically found in more defensive sectors and tend to demonstrate less price fluctuation compared to the broader market.

To compile our list of the 15 Best Large-Cap Value Stocks to Buy as the Recession Hits, we focused on companies from industries anticipated to remain resilient during an economic downturn, including utilities, healthcare, and consumer goods. We also selected stocks trading at a forward price-to-earnings (P/E) ratio of approximately 20.0x or lower. Furthermore, stocks were ranked in ascending order based on hedge fund sentiment, as recorded in Q4 2024.

Why do we prioritize stocks that hedge funds are actively investing in? The rationale is straightforward: research indicates that we can outperform the market by mirroring the top stock picks of leading hedge funds. Our quarterly newsletter employs a strategy that selects 14 small-cap and large-cap stocks each quarter, boasting a remarkable return of 373.4% since its inception in May 2014, far surpassing its benchmark by an impressive 218 percentage points.

So, is Merck & Co., Inc. (MRK) the best large-cap value stock to invest in as the recession approaches? Let's take a closer look.

Merck & Co., Inc. (NYSE: MRK) operates as a key player in the healthcare sector.

As of April 15, the number of hedge fund holders for Merck was reported at 91, with a forward P/E ratio of approximately 8.7x.

Nico Chen, an analyst at DBS, recently maintained a 'Buy' rating on Mercks stock, setting a price target of $100.00. This positive outlook stems from various factors that highlight the company's solid market positioning and growth potential. Chen identifies KEYTRUDA, Mercks flagship oncology drug, as a significant contributor to the optimistic forecast. In fiscal year 2024, KEYTRUDA sales surged by 18% year-over-year, reaching an impressive $29.5 billion. Notably, when adjusting for foreign exchange fluctuations, sales experienced a remarkable 22% increase. The analyst believes that KEYTRUDA's success continues to bolster Merck's foothold in global markets.

In addition, the Goldman Sachs analyst team has initiated coverage of Mercks stock, also assigning a 'Buy' rating. Their evaluation suggests that the market may be imposing overly negative expectations regarding Merck's terminal growth rate, failing to adequately account for the potential of the companys pipeline and undervaluing its growing Animal Health division.

However, its worth noting that during the third quarter, GreensKeeper Asset Management, an investment management firm, reported in their quarterly investor letter that Merck was their second-largest detractor, with a decline of 8.3%. They attributed this downturn to challenges faced by Mercks leading HPV vaccine, GARDASIL 9, which encountered inventory issues with its Chinese distributor. This situation is expected to lead to reduced shipments for the remainder of 2024. Despite these short-term hurdles, the long-term outlook for GARDASIL 9 remains positive. Meanwhile, the companys $27 billion KEYTRUDA franchise continues to grow robustly, significantly contributing to earnings growth.

Overall, Merck ranks 5th on our list of the best large-cap value stocks to consider as the recession approaches. While we recognize Mercks potential as a viable investment option, we maintain a strong belief that certain deeply undervalued AI stocks may offer even greater opportunities for substantial returns in a shorter timeframe. For instance, one AI stock has shown impressive gains since the start of 2025, while many popular AI stocks experienced losses of around 25%. If youre interested in exploring a promising AI stock that trades at less than five times its earnings, be sure to check out our report detailing this opportunity.

For further reading, dont miss our articles on the 20 Best AI Stocks to Buy Now and the 30 Best Stocks to Buy Now According to Billionaires.

Disclosure: None. This article was originally published at Insider Monkey.