Goldman Sachs’s US Economics team is anticipating three rate hikes this year, ending at a 4% rate. The rising cost of capital will have a negative impact on valuation expansion, strategists say. Therefore, companies with high-quality fundamentals are attractive to buy. It’s looking like interest rate hikes aren’t going away anytime soon even as financial conditions keep tightening. And they may continue to drag down the stock market, which sank last week after an important inflation report for August came in hotter than forecast.
Goldman Sachs’ US economics team is anticipating three more rate hikes this year, according to a September 9 equity strategy note, with the next one coming in hot on September 21 at 75 basis points. The second rate hike will follow on November 2, of 50 bps. And by December 14th, another rate hike to slow down inflation will add 25 bp. This would bring the year-end rate to anywhere between 3.75% to 4%.
The note adds that increasing nominal treasury yields, widening credit spreads, a strengthening US dollar, and compressed equity valuations add to the evidence that financial conditions are tightening.
But there may be a safe haven for investors: “The increased cost of capital will restrain valuation expansion and prompt investors to reward companies with high ‘quality’ fundamental metrics,” said David Kostin, Goldman’s chief US equity strategist.
Historically, these companies have outperformed during tight periods. Their shared characteristics include strong balance sheets, large equity capitalization, and high margins.
Below is a list of 26 out of the 50 stocks pulled from Goldman’s High-Quality basket (GSTHQUAL) that have quality scores above the basket’s median of 86. Since tightening financial conditions are a key source of macro uncertainty, the investment bank predicts that these stocks should generate attractive risk-adjusted returns.
The high-quality score is a combination of strong balance sheets, histories of stable sales and earnings growth, above-average return on equity, and low historical drawdown risk.