Goldman Sachs offers three main strategies to ride out a tough second half

Published Tue, Jul 5 202211:37 AM EDTUpdated Tue, Jul 5 202212:16 PM EDT

Goldman Sachs sees more pain ahead for stocks in the second half of 2022 as corporate earnings weaken. For equity investors bruised on this year's roller coaster, the Wall Street firm broke down three stable strategies to help smooth the ride. The S & P 500 just suffered its worst first half since 1970 as investors continue to worry that the Federal Reserve's interest rate hikes will thrust the economy into a recession. What's more, Goldman believes downward earnings revisions could weigh on stocks during the second half, regardless of the risk of a formal recession. "No S & P 500 sector beyond Energy generated a positive return in 1H. Daily volatility has been extremely elevated," David Kostin, Goldman's head of U.S. equity strategy, said in a note to clients. "We expect consensus profit margin forecasts to fall which will lead to downward EPS revisions whether or not the economy falls into recession." Stocks are still stuck in a bear market, with the S & P 500 down more than 20% from its early January record high. Looking into the second half, Goldman came up with three main strategies for clients struggling to cope, saying to look to: (1) Stocks with stable earnings growth (2) Health care (3) Stocks with a combination of high dividend yield and growth. Stable earnings growth Goldman said investors in the second half should focus on stocks with proven track records of earnings growth as the economy continues to slow. "Environments of slowing economic growth and tightening financial conditions have historically supported the outperformance of stocks with 'quality' attributes," Kostin said. 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 4 percentage points year to date, Goldman said. It includes consumer names such as Home Depot, Colgate-Palmolive and PepsiCo . Health care Secondly, Goldman believes that the health care sector has several attributes that should drive outperformance in the medium term, and especially if the economy stalls. "Health Care margins have exhibited minimal declines during past recessions trailing only Consumer Staples in terms of margin resilience," Kostin said. "The sector has grown its EPS during each of the last six recessions." The S & P 500 health care sector has fallen 9% in 2022, compared to a 21% loss for the broader market. Dividend growth In such a volatile environment, investors could also turn to dividend-paying investments for a stable source of income, Goldman said. "S & P 500 dividends represent an attractive opportunity, even if a recession materializes in 2023. S & P 500 dividends fell by just 1% around the median recession since 1945," Kostin said. "We also prefer stocks with a combination of high dividend yield and growth." Goldman has a basket that consists of 50 stocks with an above-average dividend yield and the fastest expected dividend growth. The basket pays a dividend of 3.8%, nearly double the S & P 500′s 2.1%. The median stock also grows dividends twice as fast as the S & P 500, Goldman said. Verizon , Best Buy , Whirlpool and Tapestry are some of the names in Goldman's basket.