Goldman says these are the winners and losers as the Fed tightens financial conditions

Published Mon, Jan 24 202211:32 AM ESTUpdated Mon, Jan 24 202212:21 PM EST

The market sell-off accelerated Monday, as investors braced for a potential hawkish tilt from the Federal Reserve this week. For investors on edge about the violent price swings in the market, Goldman Sachs broke down stocks that would be the biggest winners and losers from the central bank's action. The S & P 500 dipped into correction territory on Monday, falling more than 10% from its record high . The steep decline came ahead of the Fed's policy meeting this week, which could offer investors fresh clues on how much the central bank will raise interest rates this year and when it will start tightening its policy stance. Goldman Sachs said over the weekend that it sees the possibility of the Fed raising rates this year more than the market anticipates, adding the central bank could start running off the nearly $9 trillion in assets it is holding in July. The Wall Street firm believes that when financial conditions tighten, highly profitable, well-capitalized companies perform best, while firms with weak balance sheets stand to suffer the most. "The performance of stocks with perceived 'quality' attributes such as high return on capital, strong balance sheets, and low realized volatility is positively correlated with tighter financial conditions," Goldman chief U.S. equity strategist David Kostin said in a note. The bank screened Russell 3000 stocks for companies with strong balance sheets, high margins and reasonable valuations. The stocks have Altman Z-scores and 2022 net margins in the index top quartile, as well as above-average free cash flow yields. Covid-related names Moderna and Regeneron Pharmaceuticals made the list with double-digit free cash flow yields. Shares of Moderna have fallen more than 40% year to date, however, following a banner year of 2021 where its stock rallied 143%. Coterra Energy , Louisiana-Pacific , Skyworks Solutions and MKS Instruments also present qualities of high return on capital, strong balance sheets that could help them fare well in tighter conditions. On the flip side, Goldman also identified stocks that could face the biggest trouble ahead. "Firms with weak balance sheets have greater risk of needing to access financial markets at an inopportune moment — potentially leading to spending cuts, dilutive equity offerings, poor debt terms, and a higher cost of capital," Kostin said. The bank screened Russell 3000 stocks with weak balance sheets and a high rate of free cash flow burn relative to cash on balance sheet. Electric pickup maker Rivian Automotive was at the top of Goldman's list. The company was one of the biggest IPOs of 2021 with its market cap briefly topping those traditional automakers like Ford and General Motors. However, the stock has wiped out all the post-debut pop, falling more than 40% in the new year. Sunrun was also highlighted by Goldman. The clean energy play is already having a tough time, with shares down more than 30% on the year. PureCycle Technologies , Riot Blockchain , Freshpet and Carvana could also have a lot to lose, according to Goldman.

A trader works inside a booth on the floor of the New York Stock Exchange (NYSE) in New York City, January 18, 2022.

Brendan McDermid | Reuters