According to David Kostin, chief US equity strategist at Goldman Sachs, the stock market could fall further, and investors should look for stocks that have the backing to remain stable. Stock futures pointed to a brutal open Monday on the heels of Wall Street’s worst week since January. The pullback comes as investors have become increasingly concerned about a recession as the Federal Reserve tries to fight sky-high inflation. In the event of a recession, Wall Street’s earnings estimates are too high and stocks could drop significantly from here, Kostin wrote in a note to clients over the weekend. “Some analysts have recently cut EPS estimates, but the consensus profit outlook remains above our forecast. Prices move faster than analysts’ estimates. If the consensus 2023 EPS estimate reaches our end by the end of the year. Top-down forecast of $239 and halving towards P/E multiple. Holds steady at 17x, implied index level will be 4165. In a bearish, if EPS forecast drops halfway to $200, 14x P/ES Will bring the & P 500 to 3150,” Kostin wrote. However, recessions do not affect every stock equally. Goldman advised investors to look at dividend payers and stocks with a “margin of safety,” or stocks that “trade at valuations below the previous bear market even after the theoretical EPS haircut.” The list includes several energy stocks that, despite being major outperformers this year, are trading at relatively low valuations. Chevron and EOG Resources posted 49.5% and 62.1% growth, respectively, this week to date. Many energy companies have pledged to focus on shareholder returns, which could help support stock prices and dividend growth, even as an economic downturn pushes oil prices off their current boil. However, other stocks on the list have underperformed the market this year. Best Buy is down 29.4% year to date, while T. The row price has shed more than 40%. One advantage for Best Buy is that the retailer has already lowered its guidance last month, meaning the stock could be ahead of the curve in revaluations by investors. On the other hand, T. Roe Price sports an attractive dividend yield of over 4%. According to Goldman, the stock is already trading well below its price-to-earnings valuation since March 2009 and only slightly above its level since March 2020. — CNBC’s Michael Bloom contributed to this report.
