Goldman Sachs is seeing elevated risk of an economic downturn on the horizon, and the Wall Street firm is advising clients to hide out in stable stocks with less earnings volatility. Goldman has called for a 35% chance of a recession in the U.S. over the next two years or so as surging inflation that is causing the Federal Reserve to raise interest rates poses a danger to the economy. In an environment of slowing economic growth and tightening financial conditions, Goldman said stable stocks – those with low stock volatility and consistent earnings – typically outperform. The bank has a "Stable Growth basket" that consists of the 50 Russell 1000 stocks with the most stable EBITDA growth during the past 10 years. Goldman screened for stocks in every sector with stable historical EBITDA growth as well as low realized and implied price volatility that signal the market's confidence in continued fundamental stability. The basket of stocks has outperformed the S & P 500 by 5 percentage points during the past six months, but appears to have room to run, Goldman said. "Stable stocks lagged dramatically against the strong economic backdrop of the last two years," Goldman strategists said in a note. "Despite recent outperformance, stable stocks do not appear to be pricing the slowdown suggested by recent industry rotations or our economists' GDP forecasts." Tech giant Alphabet has above-consensus and stable earnings growth, according to Goldman. The tech name has fallen about 12% this year, however, as investors rotated out of growth names in the face of higher interest rates. Consumer names Domino's Pizza , Home Depot and PepsiCo also made the list. Consumer staples are classic defensive plays given their steady earnings and often sizable dividend. Johnson & Johnson is also highlighted by Goldman. J & J has outperformed the market this year with a near 4% gain, but the company on Tuesday lowered its full-year sales and earnings outlook, and stopped providing Covid-19 vaccine revenue guidance due to a global supply surplus and demand uncertainty. Northern Trust, Nasdaq , Oracle and Visa are also in Goldman's basket.
A trader works on the trading floor at the New York Stock Exchange (NYSE) in New York, April 11, 2022.
Andrew Kelly | Reuters
Goldman Sachs is seeing elevated risk of an economic downturn on the horizon, and the Wall Street firm is advising clients to hide out in stable stocks with less earnings volatility.