As interest rates remain elevated for an extended period, the broader stock market may face challenges, prompting investors to focus on companies with stable earnings growth capable of thriving during economic downturns, according to Goldman Sachs. ‘Equities will likely struggle to gain traction if rates continue to increase sharply,’ said David Kostin, Goldman’s U.S. equity strategy head, in a recent report. ‘Stocks with stable growth usually outperform during periods of decelerating economic expansion.’ Recent inflation data suggests persistent price pressures, leading the market to anticipate the Federal Reserve maintaining higher interest rates for an extended duration. Concurrently, economic activity appears to be slowing, with real gross domestic product growth falling to 1.6%, below economists’ expectations. The market, which initially anticipated six rate cuts this year, now projects only one, as per the FedWatch tracker followed by the CME Group, which derives probabilities from fed funds futures contracts. The S&P 500 has declined approximately 3% from its 52-week high after reaching record levels in late March. In light of this economic climate, Goldman advises clients to invest in stocks with stable growth. The bank screened Russell 1000 stocks to identify those with the most consistent earnings growth before taxes, depreciation, and amortization on a quarterly basis over the past decade. ‘If the outlook for earnings growth deteriorates, the recent trend of superior performance by quality stocks will likely continue and may include stocks with stable growth,’ Goldman stated. The screening process yielded several consumer staples companies, including PepsiCo and Colgate-Palmolive, which are typically noncyclical and less susceptible to economic fluctuations. Industrial companies like Waste Management and Fastenal, along with consumer discretionary names such as Domino’s Pizza and AutoZone, also made the list.
Goldman Sachs: Stable Earnings Growth Companies May Weather Higher Interest Rates
