Goldman is worried this could be like the 1970s and is recommending these stocks

Published Mon, Apr 4 202210:00 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The combination of high inflation and rising rates could make the recent action in the bond market more concerning for investors, according to Goldman Sachs. David Kostin, the chief U.S. equity strategist at Goldman, said in a note to clients over the weekend that investors should be prepared for a tough period for stocks after last week's inversion of the yield curve . Kostin noted that the S & P 500 typically rises in the two years following a yield curve inversion but called the 1970s a "clear example" of the type of macro environment that investors are facing. "Many investors note the difficulty in comparing today's macro environment with recent cases of yield curve inversion, given the extremely elevated level of inflation today. The 2s10s yield curve inverted in 1973, a more comparable period of high inflation. The S & P 500 return was negative during the subsequent 3, 6, and 12 months and ultimately entered a bear market, falling by 48% in nominal terms and 57% in real terms," the note said. The 1970s is often seen as one of the worst decades for the U.S. economy in modern history, as slow growth and high inflation supported by an energy crisis led to "stagflation." With the potential for rising rates and slowing growth amid high inflation, investors looking for growth should focus on quality in the form of earnings, Kostin said. Fortunately, some of those stocks look cheap right now, according to Goldman. "Stocks with high margins typically command a valuation premium relative to low margin peers. However, high growth, high profit margin stocks now trade at the same average valuation as high growth stocks with low or no profitability," the note said. The stocks below have estimated 2023 sales growth of more than 15% and estimated net profit margin of more than 20%, according to Goldman. The list includes several tech companies that have struggled in 2022. Internet giant Alphabet has dropped 3%, while chip stock Micron has fallen more than 18%. Shares of dating app company Match, meanwhile, are down 17% year to date. One stock on the list that has squeaked out a gain so far this year is Mastercard , up 1.3% year to date. The stock also sports a small dividend yield of 0.5%. Goldman also listed companies with little or even negative profitability to be wary of, including DraftKings , Carvana and DoorDash . -CNBC's Michael Bloom contributed to this report.

A trader works at the Goldman Sachs stall on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

The combination of high inflation and rising rates could make the recent action in the bond market more concerning for investors, according to Goldman Sachs.