Stability and cash return

The Goldman Sachs logo is reflected on the floor of the New York Stock Exchange. Photograph: Lucas Jackson/Reuters

  • Goldman Sachs analysts see no horizon for US recession

  • They advise minimal volatility in stocks, which outperformed the S&P 500

  • They consider that the debate about betting on companies with strong or weak balance sheets is unnecessary

Even as the CEOs of banks such as Citi and JP Morgan a few days ago, Jane Fraser and Jamie Dimon, respectively, talked about storms and the need to prepare for a strong and negative scenario. Or when Elon Musk said he had a “very bad feeling” about the economy, Goldman Chairman and former CEO Lloyd Blankfein on his Twitter account asked for some reassurance.

There are risks and you have to prepare for the worst, but the possibility of a moderate slowdown in the future, much less dramatic than a recession, is a highly likely scenario. That’s actually what Goldman Sachs analysts rely on, estimating growth in the fourth quarter of the year will be just 1.3%.

The probability of a recession in the next two years leaves it at 35% and indicates that the stock market “is ruling out a slowdown, not a full-blown recession.” This is how the S&P 500’s declines (nearly 20%) are seen at the moment, which is described as modest compared to those recorded when there is negative growth (a decrease of about 24%). Analysts point out that in the event of a recession, the index will be at 3600.

What are you looking for to invest

But in a note to investors, Goldman strategists acknowledged that corporate and institutional investors are concerned about a worst-case scenario. In this sense, his advice is for investors to focus on two things when placing money: Stability and return of money or cashand put aside the debate about betting on companies with strong or weak budgets.

The reason is that in an environment of slowdown and tight financial conditions, stable growth stocks and minimal volatility strategies “usually outperform”. Low-volatility stocks outperformed the S&P 500 by six percentage points year over year, and outperformed Goldman Sachs’ basket of stable stocks by two.

Additionally, given the state of the company’s balance sheets, they expect investors in the medium term to reward companies that are able to return their surplus capital to shareholders. Either through stock buybacks or through dividends.

Companies with high returns in this regard and strong balance sheets on Goldman Sachs’ list include:

eBay, Best Buy, Quest Diagnostics, Target, Nucor Corporation, Lowe’s, Cardinal Health, Meta Platforms, Masco Corporation, Qorvo, Altria Group, Union Pacific, McKesson Corporation, LKQ Corporation, Applied Materials, 3M Company, Cummins, Lockheed Martin, CH Robinson Worldwide, Home Depot, Skyworks Solutions, O’Reilly Automotive.

Looking beyond balance sheets

In the debate over weak or strong balance sheets, this Wall Street bank shows that stocks of companies with weak balance sheets currently do better than companies with strong balance sheets (i.e. with different liquidity ratios at high levels), which is important. This does not usually happen before a recession and when financial conditions tighten.

This does not mean for Goldman Sachs that a good opportunity to bet on strong budgets is created as it has in other pre-recession scenarios and is included in the evidence on which it is based. According to these analysts, there is a small premium associated with strong balance sheets today. “Instead, investors are placing more importance on long-term growth, revenue stability and net margins.”

Additionally, while it’s common to bet companies with strong balance sheets in these situations and this has been the case in four of the last five recessions, the truth is that this may resemble the one that left the model. Many investors see as many elements of the current market situation as it was in 2001 when the bubble burst. dot com Firms with strong balance sheets have performed much worse than firms with weak balance sheets.

Finally, the balance sheets of large-cap companies have a strong position and No fears of bankruptcy risk So the discrimination is not that extreme. “The overall net leverage of the S&P 500 companies has declined in recent months and is in line with the long-term average even though it came from a time when interest rates were historically very low,” they say.

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