Goldman's 4-part plan for stock investors the rest of the year

Published Mon, Sep 12 202210:48 AM EDT

For investors struggling to navigate the tricky market in the face of slowing growth and higher interest rates, Goldman Sachs came up with a game plan for the rest of 2022. David Kostin, Goldman's head of U.S. equity strategy, in a Friday note to clients broke down four strategies to drive performance for equity investors. The widely followed strategist said the jump in rates has had an acute impact on equity valuations and especially on high-growth stocks. Meanwhile, the risk of a recession in the U.S. could further weigh on equities in the foreseeable future, Kostin said. The Wall Street firm's baseline forecast for the S & P 500 is 4,300 at the end of this year, about 7% above today's level. The equity benchmark just posted its first positive week in four and is nearly 12% off its June low. Quality stocks Goldman said stocks with "quality" fundamentals could outperform as tightening financial conditions and the increased cost of capital caps P/E ratios and other valuation yardsticks. "The increased cost of capital will restrain valuation expansion and prompt investors to reward companies with high 'quality' fundamental metrics," Kostin said. Goldman put together a basket of 50 quality stocks with the highest "quality" scores in each sector. Stocks with high quality scores have a combination of strong balance sheets, histories of stable sales and earnings growth, above-average return on equity and low historical drawdown risk, Goldman said. Under-owned value names Value stocks have outperformed their growth counterparts in recent months as rising rates dented appetites for the latter. Goldman believes this trend will persist under either of two scenarios – Inflation peaks in the near future and focus turns to the end of the hiking cycle; The Fed tightens so much that it tips the economy into a recession. The Wall Street firm found a number of stocks that value-oriented mutual fund managers under-own relative to their style benchmarks, including Pfizer , AT & T , Moderna , Ford and Altria Group. "If the Value factor begins to outperform, then investors will seek to reduce tracking error and buy shares in firms they do not currently own or in which they have an underweight holding," Kostin said. Dividend payers Focusing on stocks with high dividend payouts could also provide a stable source of income in times of volatility, Goldman said. "Dividends offer investors exposure to S & P 500 fundamental growth while minimizing exposure to equity valuation risk," Kostin said. "Investing in dividends involves taking a view on corporate cash spending priorities." The Wall Street firm highlighted several dividend payers, including Lumen Technologies , which pays a 10.4% yield. Best Buy has a 4.7% dividend and IBM pays 5.1%. Domestically focused Lastly, while the U.S. is already experiencing soaring inflation and slowing growth, the economic situation in Europe is dire, Goldman said, urging investors to focus on stocks with primarily domestic revenues. "Despite concerns that investors have about the US equity market, we believe it offers greater absolute and risk-adjusted return potential than recession-plagued European markets," Kostin said. The strategist noted that the trade-weighted dollar has strengthened by 9% this year and represents an earnings headwind for those firms with a high proportion of non-U.S. sales. Companies with zero percentage of foreign sales include Charter Communications , Dollar General , Chipotle Mexican Grill, Kroger , Devon Energy and Southwest Airlines, according to Goldman.