Goldman says buy these quality stocks as Fed uncertainty potentially roils markets

Published Mon, Aug 2 202110:18 AM EDTUpdated Mon, Aug 2 202110:45 AM EDT

The Federal Reserve is moving closer to tapering its massive asset purchases to support the economy, posing a risk to the stock market at record highs. Goldman Sachs said investors should focus on high-quality companies with strong balance sheets until there is more certainty on the central bank's next move. Fed Chairman Jerome Powell last week said substantial economic improvement is needed for the the central bank to start dialing back its easy-money policies. The Fed chief said discussions have started about how to approach scaling back the bond buying, but no decision has been made on the exact timing. Goldman projected the Fed will formally announce the decision to decrease the size of its $120 billion monthly asset purchases at its December meeting and begin tapering in early 2022. Some investors fear that 2013's infamous taper tantrum will be replayed this year. Back then, Fed Chair Ben Bernanke's comments about tapering sparked a 5% drop in the S & P 500 and triggered a 40-basis-point jump in 10-year Treasury yield to 2.6% in just five days. Goldman is advising clients to buy companies with solid balance sheets to ride out the Fed uncertainty. The Wall Street firm's Strong Balance Sheet basket has outperformed the S & P 500 by five percentage points since the beginning of June. "Strategies focused on higher-quality companies have been outperforming recently," Goldman head of U.S. equity strategy David Kostin said in a note. "This trend is likely due in part to uncertainty about Fed policy, decelerating economic growth, and concerns about the growth outlook." The Strong Balance Sheet basket contains 50 S & P 500 companies across eight sectors with high Altman Z-scores. The Altman Z-score is a formula for determining whether a company is headed for bankruptcy as it takes into account profitability, leverage, liquidity and solvency. The list contains megacap tech names like Facebook and Alphabet. Alphabet last week reported earnings that crushed Wall Street's expectations , as it saw dramatic advertising growth amid the pandemic bounce-back. Facebook also beat earnings expectations, but the social media giant warned of growth slowdown ahead. Goldman's basket also includes semiconductor leaders Nvidia and AMD . It also contains a slew of software companies, such as Intuit , Adobe and Cadence Design Systems . Tesla is also highlighted by Goldman. The electric car maker just reported more than $1 billion in net income during the second quarter, up tenfold from a year ago. The stock is about flat this year following a whopping 740% rally in 2020.

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Brendan McDermid | Reuters