Stocks currently are trading around 15 times earnings after starting 2018 with an 18 multiple. Worries about higher interest rates, the U.S.-China trade tensions and the pace of Federal Reserve interest rate hikes shook the market through the year, with the volatility climaxing in a late-year flirtation with a bear market.
Investors also are concerned that a global economic slowdown also could infect the U.S., which is coming off its best year of a recovery that began in mid-2009. GDP averaged 3.2 percent in the first three quarters and is expected to come in around 2.9 percent for the fourth quarter, according to the CNBC Rapid Update tracker.
Kostin pointed out that S&P 500 returns have been positive 81 percent of the time since 1930 when GDP growth retreats by less than 2 percentage points.
“Positive headlines around trade discussions with China and dovish Fed commentary would provide near-term relief to equity market uncertainty and represent a potential catalyst for higher equity prices,” he said. “Stabilization in economic data, both in the US and abroad, could also lift investors’ confidence regarding the longevity of the current expansion, which in July will mark its 10th anniversary (the longest since at least 1850).”
Goldman recommends investors up their cash allocations, which are around 30-year lows, as equivalents like three-month Treasury bills now provide healthy yields.
In addition, the firm is recommending stocks that combine quality with strong balance sheets, a group it said has outperformed since Dec. 3 during the worst of the market sell-off.
“We believe these stocks will be of particular interest to equity investors seeking stability and relatively limited downside,” Kostin wrote.
Along with the above-mentioned companies, the basket’s top names also include KLA-Tencor, Walgreens Boots Alliance, Essex Property Trust, Amerisource Bergen and Tyson Foods.