'Insure against the worst': Goldman picks stocks for a soft — and hard — economic landing

Published Mon, Feb 20 20238:00 PM ESTUpdated Tue, Feb 21 20236:56 AM EST

Investors are on edge after U.S. stocks fell for three consecutive weeks , signaling the possibility of higher interest rates for longer than expected. The yield on the 6-month and 1-year Treasury bonds closed at 5% on Friday, thanks to several economic data releases last week that pointed toward a strong U.S. economy. A rise in bond yields leads to increased borrowing costs for companies, which adds downward pressure on stocks. Despite this challenging environment, Goldman Sachs remains optimistic and expects a "soft-landing" for the U.S. economy. In this scenario, inflation is controlled with a mild recession at most. Nevertheless, the investment bank recommended that its clients: "Expect the best (soft-landing) but insure against the worst (hard-landing)," in a note published on Feb. 17. "Growth, inflation, earnings, margins, and rates drive our [stock] recommendations," the bank said in the note, entitled "Where to Invest Now." 'Soft-landing' stock picks To capture the upside in a soft-landing scenario, the Wall Street bank said that investors should own stocks that can benefit from a decelerating inflation environment. What follows are the first four stocks named by Goldman Sachs in its "soft-landing portfolio." The bank describes the list as "cyclical laggards with low valuations and strong balance sheets" on the Russell 3000 . Goldman's picks include Tesla ; Garmin , the GPS technology company; Mohawk Industries , a global flooring manufacturer; and TopBuild , a supplier of insulation and building material. Goldman Sachs analysts expect an earnings-per-share growth of 5% for Tesla and 7% for Garmin over the next 12 months, compared to a 1% growth for the S & P 500. 'Hard-landing' stock picks Although not the bank's base case, Goldman also provided investors with a "hard-landing portfolio" of Russell 1000 companies with "low valuations, strong balance sheets, [and] dividend yield." The top names on this list were video game giants video Activision Blizzard and Electronic Arts , along with retailers Home Depot and Lowe's Companies . The Wall Street bank also told clients to own companies with resilient margins, as these are expected to hold up better in an economic downturn. Investors should avoid stocks with vulnerable margins, it added, especially if there is a chance that the recent decline in cost-cutting and expenses could reverse. Goldman Sachs has previously predicted that the S & P 500 will finish the year at the same level it started —4,000 — representing a return of 0% for 2023. It ended Friday at 4,079.09. —CNBC's Michael Bloom contributed to this report.