Goldman Sachs doesn’t expect a recession, but says investors should lower their expectations. Chief US stock strategist David Kostin thinks estimates for company profits will have to come down. He named a group of 21 companies with a history of strong results in recessions. Whether a recession is coming or not, everyone in the financial world is taking the possibility seriously enough that they’re planning out what to do if it happens.
For instance, Goldman Sachs still says there probably won’t be a recession. But even in that optimistic scenario, it thinks company profits are going to get weaker than most experts expect.
“We expect cautious commentary will prompt cuts to forward estimates,” Chief US Equity Strategist David Kostin wrote in a recent note to clients. “We believe these forecasts are too optimistic, primarily due to overly optimistic margin estimates. 2Q earnings season will likely be a catalyst for negative revisions as companies offer cautious commentary.”
His firm says forecasts for both 2022 and 2023 are too high right now even without a recession. That’s an important negative for equities, as profits are ultimately the foundation for stock prices.
It goes without saying that in a recession things will only get worse for stocks. Kostin says that the benchmark S&P 500 could hit 3,150 by the end of this year if a recession is confirmed.
He writes that S&P 500 earnings could fall 11% in 2023, and they could fall even further than that if the US government and the Federal Reserve are overly cautious about supporting the economy because of ongoing worries about inflation, or if weakness is overly concentrated in the technology sector , which is the largest of the major stock market sectors.
With those considerations in mind, Kostin and his team examined 250 stocks on the S&P 500 to find the companies whose profits held up the best during the recessions that started in 2001, 2008, and 2020.
“We then compare the gap between consensus 2023 margin and sales estimates and the median experience of the past three recessions,” Kostin said. The idea is to find companies whose profits will hold up better in a downturn, as that’s going to make it more likely their stocks will outperform.
The Goldman team evaluated those companies based on two statistics: the expected change in their profit margins in 2023, and the average profit margin decline they’ve endured over the past three recessions. The idea is to highlight companies where Wall Street is overly bearish, as a recession is either largely priced in at this early stage, or where the changes won’t be as bad as investors think.
The analysts at Goldman Sachs narrowed their best ideas down to the 21 stocks listed below. In a few cases, Goldman’s companies’ margins are likely to be better than analysts expect today even if a recession hits.