Goldman’s official 2023 outlook is here: Where it thinks the market is headed and what to buy

Published Tue, Nov 22 202211:43 AM EST

Goldman Sachs is predicting zero earnings growth in 2023, with stocks ending the next year essentially flat. The firm is pegging 2023 S & P 500 earnings-per-share flat at $224 and the index ending next year at 4,000, just over 1% from Monday's close. The S & P will also have an unchanged price-to-earnings multiple of 17x, said David Kostin, Goldman's chief U.S. equity strategist. "We expect less pain but also no gain," he wrote in a note Monday. However, stocks won't stay in a straight line all year. Instead, Kostin predicts stocks will drop at first. His three-month target on the S & P 500 is 3,600, 8.86% lower from Monday's close. He expects the Federal Reserve 's tightening cycle will end in May, which will cause investors to shift their focus to growth in 2024. Goldman's baseline forecast assumes a soft landing for the U.S. economy. "Under the soft landing scenario, our economists forecast below-trend GDP growth will be accompanied by just a 1/2 point increase in the unemployment rate to 4.1% and the US economy will avoid recession in 2023," Kostin wrote. However, a hard landing recession scenario remains a distinct risk, he said. If that happens, he expects the S & P would reach a trough at 3,150. "The combination of a flat return under our base case and large downside in a recession means investors should remain cautious," Kostin said. That means tilting portfolios toward defensive sectors with low interest-rate risk, he said. Goldman recommends investors overweight consumer staples and health care, which tend to outperform amid slowing growth and rising real rates. The firm also likes the energy sector, which has historically outperformed in periods of stagflation, Kostin said. Goldman also recommends being overweight in telecommunication services, as well as consumer durables and apparel. While utilities have also typically outperformed, they are trading at record-high valuations and therefore Goldman has a neutral rating on the sector. In this environment, investors should also own stocks that are leveraged to decelerating inflation, Kostin said. He identified 39 stocks from industry groups that typically outperform when inflation is high. They also have a forward earnings yield for the next 12 months and trailing last-12-months free-cash-flow yield above those in their respective sectors and the aggregate index, Kostin said. In addition, the stocks outperformed their respective industry group the day of the recent consumer price index data was released. Here are 10 of those names. Health-care company Organon , which focuses on contraception and fertility brands, has an EPS next-12-months yield of 20% but an estimated 5% decline in EPS growth for 2023, according to Goldman. Organon, which had been spun off from Merck, recently told CNBC its aspirations are to invest in future opportunities to broaden its portfolio and identify treatments, diagnostics and devices built around patients' needs. The stock has 28% upside to the average analyst price target, according to FactSet. Citigroup , meanwhile, recently let go of about 50 trading personnel, people with knowledge of the cuts told CNBC's Hugh Son . The bank's EPS yield for the next 12 months is 14%, while its estimated EPS will decline by 12% in 2023, according to Goldman. Walgreens Boots Alliance 's stock recently saw a boost after it said it would invest $3.5 billion to support VillageMD's acquisition of urgent care provider Summit Health. Last month, the company reported a sales beat and in-line earnings for its fiscal fourth quarter. Walgreens's EPS yield for the next 12 months is 11% and its estimated 2023 earnings growth is 2%, Goldman found. Lowe's also has a positive quarter, reporting third-quarter earnings that topped Wall Street expectations. The company also upped its guidance for its full-year earnings. Its next-12-month EPS yield is 7% and its estimated EPS growth for 2023 is 4%, according to Goldman. — CNBC's Michael Bloom contributed reporting.