Given the stock market’s recent volatility, you may be looking for stocks with more stability. Goldman Sachs has just the list for you.
“Stable stocks – those with low share-price and earnings-growth volatility – typically outperform in environments of slowing economic growth and tightening financial conditions,” Goldman strategists say.
“These dynamics describe the Goldman Sachs economic outlook for coming months.”
Goldman economists expect average economic growth to slow from 6% in 2021 to 3% in 2022 and 2% in 2023.
Goldman’s Stable Growth basket of stocks has outperformed the S&P 500 by 5 percentage points over the past six months and still “appears to have room to run,” the strategist said.
“Stable stocks do not appear to be pricing the slowdown suggested by recent industry rotations or our economists’ GDP forecasts.”
What About Market Pricing?
Valuation also is an issue.
“Stable stocks typically trade with a valuation premium to the market, but the premium today is surprisingly small given concerns about Fed tightening and potential recession,” the strategists said.
Interest-rate futures traders see a 90% probability that the Federal Reserve will raise interest rates by at least 225 basis points for the rest of the year.
Stable growth stocks are now trading with a price-earnings premium of just 8% over the market as a whole, compared to a 35-year average of 15%, the strategists said.
“In 2018, another late-cycle environment of slowing GDP and Fed tightening, stable stocks traded with a premium of more than 20%.”
Plenty of investors believe secular growth stocks should outperform as economic growth slows. “
Slowing Growth Remains a Red Flag
However, many growth stocks appear vulnerable to tightening financial conditions and trade with elevated valuations,” the strategists said.
For its Stable Growth basket, Goldman chose 50 Russell 1000 stocks with the most stable
EBITDA growth during the past 10 years.
It excluded stocks whose largest year-over-year earnings decline in the past five years ranks in the bottom 10% of their sector.
Goldman also excluded stocks ranking in the bottom 10% of their sectors based on consensus 2023 earnings-per-share growth estimates.
The basket includes Alphabet (GOOGL), Home Depot HD, PespsiCo (PEP), energy infrastructure company Williams (WMB), insurance brokerage Marsh & McLennan (MMC), Johnson & Johnson (JNJ), Waste Management (WM), Visa (V), Oracle (ORCL) and telecommunications infrastructure company American Tower (AMT).
The author of this story owns shares of Alphabet, Pepsi, Johnson & Johnson and American Tower.
