- Stocks are selling off as investors worry about the chances of a recession.
- Goldman Sachs thinks headwinds like restrictive monetary policy won’t be enough to tank the economy.
- These 24 stocks are the top picks among Goldman Sachs analysts right now.
If you’re concerned about a recession this year, you’re contributing to the problem.
The S&P 500 gave up a significant portion of its year-to-date gains in September, as renewed fears of a recession and subsequent stock market downturn sent investors scrambling to lock in profits. While external forces appear to be threatening markets, Dominic Wilson, senior advisor in Goldman Sachs’ global markets research group, believes investors will make recession fears self-fulfilling.
Wilson wrote in a note to clients late last week that the strength of the US economy has pushed markets higher for the majority of the year. However, the Federal Reserve has concluded that it can keep rates higher for longer, stifling inflation at the expense of economic growth.
In other words, the economy’s greatest strength has now become its greatest weakness.
“Given the starting point, this better growth news has mostly been viewed as ‘too much of a good thing’, translating not into more cyclical optimism but instead into higher yields and higher oil prices since July,” Wilson wrote in a note. “As a result, our tools interpret recent market shifts almost entirely as a sizable ‘policy shock’, extended by the FOMC last week.”
It’s not that the economy has deteriorated. The issue is that investors believe the economy is in worse shape as it approaches the end of the year due to restrictive monetary policy.
This has triggered a stock market sell-off, which could last until 2024 due to a slew of economic headwinds emerging in the fourth quarter.
Director of Americas Equity Research Steven Kron listed the many problems plaguing the economy that have sent investors fleeing earlier this week in a note to clients published earlier this week. Higher gasoline prices will hurt consumer spending, as will “the return of student loan payments, labor strikes, and a still-potential government shutdown.”
Under the hood, however, stocks are actually doing better than the headlines would suggest.
“Over the last nine weeks, bottom up NTM earnings estimates for S&P 500 companies have RISEN 4.5%,” Kron wrote, emphasizing his point. “Admittedly, it is normal for estimates to hold steady at this time of the quarter due to fewer companies reporting results, but it is nevertheless encouraging that estimates have shown continued improvement even in the face of negative equity returns.”
Just as Kron believes stocks have underlying strength that the market is overlooking, Wilson believes investors concerned about a recession are placing “too much emphasis on what is likely to be a temporary weak patch that will eventually give way to firmer growth,” he wrote.
In the short term, perception may matter more than reality. Investor sentiment has driven markets all year, particularly the euphoria over the potential of artificial intelligence, which sent shares of a few key tech stocks higher and dragged the rest of the S&P 500 with them.
Now that sentiment has shifted into risk-off mode, no matter how strong the economy is beneath the surface, investors will be unable to shake their concerns.
“Coming on the heels of the oil and rate moves, we think the market is more likely than we are to embrace the narrative that slower Q4 growth is the precursor to something deeper and raise the risk of a recession,” Wilson said in a note. “Ultimately, we believe that fear will fade.” However, the chances of the fear spreading further appear to be quite high.”
Wilson, on the other hand, believes the economy can continue to grow and reiterated that Goldman Sachs has higher expectations for economic growth and sees fewer chances of a recession than the Wall Street consensus.
“As we look towards year-end and into early 2024, our confidence in the underlying health of the US economy remains high, as several drivers of income growth in 2023 (jobs and real wage growth) are likely to repeat in 2024, although at a lower clip,” Wilson wrote in his report.
24 top stocks to buy in the coming year
The economy may have a lot to deal with in the coming months, and the numerous issues it faces could send stocks plummeting before the end of the year. However, Wilson believes that these issues are simply a “pothole” that the market will eventually overcome.
If that is the case, and stocks do recover in 2024, smart investors should position themselves now for future profits.
Goldman Sachs’ highest-conviction stock picks, a list compiled by Kron of investment recommendations from analysts across the company who believe these stocks will provide strong risk-adjusted returns, are one way to accomplish this.
The 24 stocks that made the cut are listed below, along with their ticker, October 3 price, price target, percent upside to that target, upside to next year’s expected earnings versus consensus estimates, and the percentage of Wall Street that recommends the stock as a buy. In addition, each stock’s investment thesis is summarized briefly.