Stocks to buy for cash flow despite Fed rate hikes: Goldman Sachs

  • Higher interest rates mean a bleaker economic outlook and another disruption to the stock market.
  • Goldman Sachs lowered its 2022 forecast for the S&P 500 Index.
  • The company says that high-quality, short-term stocks will outperform the long-term.

On Wednesday, the Federal Open Market Committee raised its key interest rate by 75 basis points for the third time in a row.

Their decision raised the federal funds rate to a range between 3% and 3.25%, the highest level since early 2008. Their median forecast is that this rate will be 4.4% by the end of this year.

As the struggle to crush inflation continues, Wall Street is dealing with what higher rates along with lower inflation can bring: lower consumer demand slowing the economy, and weaker stock prices. On Friday, concerns about an interest rate hike by the Federal Reserve pushed the Standard & Poor’s 500 to its lowest levels for the year.

a day ago , Goldman Sachs Equity strategists lowered their year-end target for the index from 4,300, which it hit in mid-August, to 3,600.

“The expected path of interest rates is now higher than we previously assumed, which tilts the distribution of stock market results below our previous expectations,” strategists led by David Kostin said in a note.

One such consequence is the so-called hard landing, where higher rates lead to a recession. Costin said that scenario could see the S&P 500 drop to 3400 by the end of the year, and 3150 by the end of the first quarter.

low Unemployment rate It indicates that consumer incomes and spending may rise by next year. He said this scenario would keep inflation high and lead the Fed to raise interest rates more than current expectations.

He added that based on the team’s conversations with clients, the majority of equity investors now believe a hard landing is inevitable. What remains unclear is the timing, size and duration of a possible recession. Most portfolio managers estimate that a recession could hit the US economy sometime in 2023, according to Costin.

His team is now recommending defensive positioning in light of this unpredictability. Investors should focus on stocks with strong balance sheets, high returns on capital, and consistent sales growth.

Higher interest rates also mean that short-term stocks, those that generate a greater share of their cash flow in the near future, will outperform their long-term counterparts, Kostin said. He added that that’s because stocks with cash flows tied to the distant future are more sensitive to interest rates.

Below is a list of 26 stocks that Goldman has added to the basket of short-term stocks that have been rebalanced.

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