Investment advice from Goldman Sachs

  • Goldman Sachs does not expect a recession, but says investors should lower their expectations.
  • Chief U.S. equity strategist David Kostin thinks corporate earnings estimates will have to drop.
  • He named a group of 21 companies with a track record of strong results in times of recession.

Whether it’s a


recession

happens or not, everyone in the financial world takes this possibility seriously enough to plan what to do if it happens.

For example, Goldman Sachs always says there probably won’t be a recession. But even in this optimistic scenario, he thinks corporate earnings will turn weaker than most pundits expect.

“We expect cautious commentary to prompt lower forward estimates,” Chief U.S. Equity Strategist David Kostin wrote in a recent note to clients. “We believe these forecasts are overly optimistic, primarily due to overly optimistic margin estimates. The Q2 earnings season will likely be a catalyst for negative revisions as companies issue cautious comments.”

His firm says forecasts for 2022 and 2023 are too high right now, even without a recession. This is a significant downside to stocks because earnings are ultimately the foundation of stock prices.

It goes without saying that in a recession, things will only get worse for equities. Kostin says the benchmark S&P 500 could hit 3,150 by the end of this year if a recession holds.

He writes that S&P 500 earnings could fall 11% in 2023, and they could fall even more if the US government and the


Federal Reserve

are too cautious about supporting the economy due to lingering concerns about inflation, or if the weakness is too concentrated in the


technology sector

which is the largest of the major stock market sectors.

With these considerations in mind, Kostin and his team looked at 250 S&P 500 stocks to find the companies whose earnings held up best during the recessions that began in 2001, 2008 and 2020.

“We then compare the gap between the 2023 consensus margin and sales estimates and the median experience of the past three recessions,” Kostin said. The idea is to find companies whose earnings will hold up better in a downturn, as this will increase the likelihood that their stocks will outperform.

The Goldman team evaluated these companies based on two statistics: the expected path of their profit margins in 2023 and the average decline in their profit margins over the past three recessions. The idea is to highlight companies where Wall Street is too bearish because a recession is either largely priced in at this early stage or where the changes won’t be as severe as investors think.

Goldman Sachs analysts have narrowed down their best ideas to the 21 stocks listed below. In a few cases, margins for Goldman companies are likely to be better than analysts expect today, even if a recession hits.

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