3 Investment Strategies from Goldman Sachs
1. Hope for the best (soft landing), and prepare for the worst (hard landing)
Goldman Sachs expects the US economy to avoid a recession this year and achieve a soft landing – where inflation comes down while the economy avoids a recession and the Fed stops raising rates. In this case they see the S&P 500 ending the year at 4000 (currently at 4100).
According to the latest survey of analysts by the Wall Street Journal, the average probability of a recession over the coming year is 65%. Goldman disagrees and sees the probability of a recession as just 25% due to: a strong labor market, China re-opening, and better than feared growth in Europe after the -80% fall in EU gas prices.
Here is a list of Halal soft landing stocks recommended by Goldman.
Exhibit 1: Soft Landing Portfolio
| Ticker | Name | PIF Comfort Rating | 2022 Performance | YTD | Forward PE | 10-Year Average Forward PE |
|---|---|---|---|---|---|---|
| TSLA | Tesla Inc | Comfortable | -65% | 60% | 22 | 117 |
| AMD | Advanced Micro Devices | Comfortable | -55% | 33% | 19 | 36 |
| SWKS | Skyworks Solutions | Comfortable | -40% | 35% | 10 | 13 |
| MHK | Mohawk Industries | Comfortable | -44% | 21% | 11 | 15 |
In the event of a hard landing i.e. a recession, then Goldman sees the S&P 500 falling to 3150 and ending the year at 3750.
Reasons why investors should remain cautious are:
- Forward earnings growth for the S&P 500 turned negative last week for only the fifth time since 2000. In the previous 4 times the S&P 500 hit new 52-week lows.
- A soft landing is already priced in the US markets after January’s outperformance of cyclical stocks.
- Valuations remain historically elevated. For example the S&P 500 currently trades at an 18x forward PE ratio which ranks in the 87th percentile since 1976.
In terms of sectors, Goldman recommends being overweight Healthcare and Consumer Staples as they:
- Outperform during slowdowns in the US economy and in recessions
- Have attractive valuations and dividend yields
- Stability in earnings during difficult economic periods.
Here is a list of halal ‘hard landing’ stocks recommended by Goldman:
Exhibit 2: Hard Landing Portfolio
| Ticker | Name | 2022 Performance | YTD | Forward PE | 10-Year Average Forward PE |
|---|---|---|---|---|---|
| BBY | Best Buy Inc | -17% | 9% | 12 | 13 |
| MDT | Medtronic Plc | -23% | 11% | 15 | 18 |
| RMD | ResMed Inc | -19% | 8% | 31 | 34 |
| PFE | Pfizer Inc | -10% | -15% | 10 | 12 |
| DHR | Danaher Corp | -19% | 0% | 26 | 27 |
| WST | West Pharmaceuticals Services | -50% | 16% | 34 | 42 |
| TECH | Bio-Techne Corp | -36% | -5% | 38 | 40 |
| CTSH | Cognizant Technology Solutions Corp | -35% | 18% | 13 | 16 |
| JKHY | Jack Henry & Associates Inc | 6% | 3% | 34 | 36 |
2. Own stocks that benefit from falling inflation
2022 was the year of inflation, and 2023 will be the year of disinflation.
Goldman is forecasting core inflation will decelerate from 5% to 2.9% by the end of this year versus the Fed’s forecast of 3.5%.
Stocks with high earnings yield and free cash flow historically outperform when inflation is high and falling.
Exhibit 3: Disinflation stocks with above-average earnings yields and free cash flow yields
| Ticker | Name | 2022 Performance | YTD | Forward PE |
|---|---|---|---|---|
| WBA | Walgreens Boot Alliance | -28% | -2% | 9 |
| EXPE | Expedia Group Inc | -51% | 37% | 11 |
| XRAY | Dentsply Sirona Inc | -43% | 21% | 17 |
3. Trade the ‘Laggard Effect’
According to Goldman’s research, over the past 20 years, there has been a tendency for calendar-year S&P 500 laggards to outperform in the subsequent first quarters.
- This trend has held up in 13 of the 20 years since they started tracking the data, with laggards generating an average outperformance of 1.4% vs. the S&P 500 in the subsequent first quarter.
- The outperformance has been more pronounced in the last two years, with 1Q of 2021 seeing record prior year laggard outperformance (+13.2% vs. the S&P 500), and 1Q22 seeing the 3rd highest outperformance over the last two decades.
Exhibit 4: Top “Comfortable” 2022 Laggard stocks
| Ticker | Company | 2022 Annual return | Year to date % |
|---|---|---|---|
| ALGN | Align Technology Inc | -68% | 59% |
| TSLA | Tesla | -65% | 63% |
| AMD | Advanced Micro Devices Inc | -55% | 31% |
| WST | West Pharmaceutical Services Inc | -50% | 13% |
| NVDA | Nvidia Corp | -50% | 52% |
| TER | Teradyne Inc | -47% | 23% |
| MHK | Mohawk Industries Inc | -44% | 18% |
| SPX | S&P 500 | -19% | 8% |
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