Introduction

The economic uncertainty in the United States is expected to exert continuous pressure on U.S. equities throughout 2023, according to Goldman Sachs. Investors are advised to focus on stocks that are returning cash to shareholders.

Economic Growth and Inflation Factors

David Kostin, Goldman’s head of U.S. equity strategy, highlights that economic growth and inflation data flow could result in a bumpy path for equities in the coming months. Goldman Sachs forecasts a slowdown in GDP growth due to factors such as the resumption of student loan payments and the impact of higher mortgage rates on the housing market. Real GDP growth is expected to decline from 3.1% in the third quarter to 1.3% in the fourth quarter.

Goldman Sachs also predicts a potential reacceleration of inflation after a period of easing. Specifically, the firm suggests that core CPI (which excludes volatile food and energy prices) could increase from 0.2% in July to 0.4% in January 2024.

Impact on Investor Confidence

Kostin warns that these factors may temporarily decrease investor confidence in a soft landing, leading to a decline in risk sentiment and equity prices.

Recommended Investment Approach

Instead of recommending stocks with dividend and buyback programs, Goldman Sachs suggests focusing on companies that allocate cash towards capital expenditures and research and development. The firm’s total cash return basket, consisting of 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.

According to Kostin, in uncertain economic environments, investors tend to be skeptical of large growth investment plans and prefer firms that prioritize returning cash to shareholders.

Outlook on Recession and Stock Market

Goldman Sachs believes the likelihood of a recession in the U.S. is very low and expects some fluctuations in economic data going forward. The firm has reduced its recession odds to just 15%, citing the Federal Reserve’s potential decision to refrain from interest rate hikes. Goldman Sachs projects the S&P 500 to reach 4,500 by the end of the year, which is only 1% above the previous closing value of 4,457.49. This target surpasses the average forecast of 4,372 among the top 15 Wall Street strategists, according to Market Strategist Survey.

Source: ‘s Michael Bloom contributed reporting.