Goldman Sachs Advises Investing in Cash-Returning Stocks Amid Market Uncertainty
Goldman Sachs suggests that the ongoing economic uncertainty may continue to exert pressure on U.S. equities until the end of 2023. In light of this, the investment bank recommends focusing on stocks that prioritize returning cash to shareholders. David Kostin, Goldman's head of U.S. equity strategy, explains that the economic growth and inflation data flow could create a volatile path for equities in the coming months. Goldman Sachs predicts a slowdown in GDP growth, attributed in part to the resumption of student loan payments and the impact of higher mortgage rates on the housing market. The firm forecasts a decline in real GDP growth to 1.3% in the fourth quarter from 3.1% in the third quarter.
Inflation Concerns and Investor Confidence
Goldman Sachs also anticipates a potential reacceleration of inflation after a period of easing. Specifically, the firm projects that core CPI, which excludes volatile food and energy prices, could increase to 0.4% in January 2024 from 0.2% in July. Kostin warns that these factors could temporarily erode investor confidence in a soft landing, leading to a decline in risk sentiment and equity prices.
Preference for Cash-Returning Stocks
Goldman Sachs advises against investing in stocks with dividend and buyback programs, instead favoring companies that allocate cash to capital expenditures and research and development. The firm's total cash return basket, comprising 50 stocks with the highest 12-month trailing yield from buybacks and dividends, has outperformed its Capex and R&D basket by 4 percentage points since the beginning of 2022. Notable stocks in the total cash return basket include Tapestry, MGM Resorts, and Lowe's. Kostin explains that in uncertain economic environments, investors tend to reward firms that prioritize returning cash to shareholders rather than undertaking large growth investments with uncertain returns.
Economic Outlook and Recession Odds
Goldman Sachs believes that while there may be some fluctuations in economic data, the likelihood of a recession in the U.S. is very low. The firm has reduced its recession odds to just 15%, citing the Federal Reserve's decision not to raise interest rates this month and the possibility of no further hikes. Goldman Sachs expects the S&P 500 to reach 4,500 by the end of the year, representing a 1% increase from Friday's close of 4,457.49. This target exceeds the average forecast of 4,372 among the top 15 Wall Street strategists, according to the CNBC Market Strategist Survey.
Conclusion: Implications for New Businesses
Goldman Sachs' advice to invest in cash-returning stocks amid market uncertainty provides valuable insights for new businesses.
Financial Management in Uncertain Times
The bank's preference for firms that prioritize returning cash to shareholders over making large, uncertain growth investments underscores the importance of prudent financial management, especially in uncertain times. New businesses should consider this approach, focusing on financial stability and delivering value to shareholders.
Understanding Market Trends
Goldman Sachs' predictions about economic growth, inflation, and equity market trends highlight the necessity for new businesses to stay informed about market dynamics. This understanding can guide strategic decisions and help businesses navigate economic uncertainty.
Recession Odds and Economic Outlook
The bank's view that the likelihood of a U.S. recession is low, despite potential economic fluctuations, offers some reassurance to new businesses. However, it's crucial for startups to prepare for all scenarios, including potential downturns.
In conclusion, Goldman Sachs' insights offer new businesses important lessons about financial management, understanding market trends, and preparing for economic uncertainty. By taking these insights into account, startups can make informed decisions that enhance their resilience and long-term success.