Goldman Sachs expects below-average returns for the next 2 years. It shares 3 strategies to beat the market and 23 stock picks across them.

• Goldman Sachs forecasts a 5% gain on the S&P 500 by the end of 2024.
• Investors can outpace the market by owning quality, some growth, and beaten-down cyclicals.
• These 23 stocks are the top picks from each category.

The Federal Reserve is not expected to raise rates again this cycle, and Treasury yields have peaked.

These are some of Goldman Sachs’ chief US equity strategist David Kostin’s and his team’s forecasts for 2024. Their outlook note, released on November 15, also indicates that they believe the economy will avoid a recession. It’s good news for the new year, and it shows they’re more optimistic than most; the Bloomberg consensus predicts a 55% chance of a recession next year.

But that doesn’t mean we’ll see a full-fledged bull market or rapid economic growth anytime soon. If Goldman’s forecast comes true, the S&P 500 will have gained 5% by the end of 2024, as opposed to 8%, which has historically been the type of return seen during election years. They anticipate another 5% increase in 2025.

However, no one can predict the future of markets with complete certainty. To account for the possibility of other outcomes, Kostin envisioned a more optimistic scenario with rate cuts and stronger economic growth. If this occurs, the S&P 500 could rise 11% next year. On the other hand, inflation could remain sticky, causing interest rates to remain higher for longer. According to the note, this could cause the index to fall by 8 to 18% on the extreme side.

However, the fate of investors does not have to be tied to the overall economy or the performance of the major indexes. If you’re willing to bet on Goldman’s baseline prediction of a below-average year, you can chart a different course by focusing on three main strategies that the investment bank expects to outperform the crowd.

These moves, however, are not for the faint of heart. Taking these bets entails holding those positions through volatility and concerns about geopolitical instability, upcoming elections, and the financial sector’s exposure to commercial real estate.

The first strategy is to invest in high-quality stocks. Even though Goldman does not anticipate a recession, investor skepticism implies that profitable companies with strong balance sheets and consistent sales and earnings growth should outperform their peers.

Meta (META), O’Reilly Automotive (ORLY), Church & Dwight (CHD), Marathon Petroleum (MPC), Intercontinental Exchange (ICE), Truist Financial (TFC), Elevance Health (ELV), Rollins Inc. (ROL), Monolithic Power Systems (MPWR), Sherwin-Williams (SHW), American Tower (AMT), and American Water Works (AWK) are among the names in Goldman’s high-quality basket.

The second strategy is to be selective when it comes to growth stocks. Companies with high returns on capital outperform their peers in an economic environment where interest rates have stabilized and growth has been consistent.

Enphase Energy (ENPH), ServiceNow (NOW), Eli Lilly & Co. (LLY), NVIDIA (NVDA), Albemarle (ALB), and EQT Corp. (EQT) are among the S&P 500 stocks that are in the top quartile for returns on invested capital (ROIC), returns on assets (ROA), and returns on equity (ROE).

The third strategy is to buy the dip on “beaten down” cyclicals that have become unpopular. In other words, ignore the naysayers. Because of the widely held pessimistic economic outlook, some stocks are already underperforming. However, if you agree with Goldman’s assessment, consider them for sale.

These five Russell 3000 stock picks have market capitalizations in excess of $2 billion and high earnings. Nonetheless, their projected sales growth is lower than in 2023. Toro Company (TTC), John Bean Technologies Corporation (JBT), Delta Air Lines (DAL), Crocs (CROX), and Alaska Air Group (ALK) are the companies involved.