Recession Could Tank The S&P Another 22%—But Tesla And These Other Stocks Could Withstand The Downturn

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Trillions of dollars in market capitalization for the nation’s largest public companies will be wiped out this year in the worst-case recession scenario outlined by Goldman Sachs strategists, with the federal government’s looming debt ceiling crisis among prospects clouding the market outlook, but the investment bank’s analysts believe several stocks are well-positioned to emerge from the grim situation relatively unscathed.

Tesla is well-poised to navigate a mild recession, per Goldman.

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Key Facts

The S&P 500 will crater to as low as 3,150 this spring in a “hard landing” recession scenario before closing 2023 at 3,750, representing 22% and 6% respective declines from a level of 4,000 on Tuesday, Goldman Sachs strategists led by David Kostin wrote in a note to clients late Monday, warning corporate earnings are set to shrink as borrowing costs mount and consumers cut spending.

In a less severe “soft landing” case, the S&P would bottom out at a 10% decline early this year before recovering to close 2023 flat, Kostin forecasted, with a growing consensus that the U.S. will enter some form of recession this year.

Kostin-led Goldman analysts identified dozens of stocks that should outperform the limping market in each recession scenario in a weekend note, screening for several metrics including forward price-to-earnings ratio, a proxy for future growth that compares expected earnings to current stock price.

Based on these metrics, the stocks best positioned to navigate a hard landing include staple retailers Home Depot and Costco, healthcare firms Pfizer and Labcorp, food giants Kroger and Tyson Foods and video game titans Activision Blizzard and Electronic Arts and Microsoft, the largest company by market cap on the list.

Though shares of Tesla tanked 65% in 2022, the electric vehicle firm helmed by Elon Musk headlines Goldman’s stock picks for a soft landing, joined by technology hardware and software companies Qualcomm, Advanced Micro Devices and Garmin and financial services firms Carlyle Group and Capital One.

To come up with its stock picks, the investment bank also looked at a firm’s profitability and debt in order to determine which firms are least likely to face bankruptcy.

Surprising Fact

The federal government’s rapid approach of its debt ceiling, likely to be reached by this summer, potentially imperils 30 stocks heavily reliant on the U.S. government for revenue, Goldman warned on Monday. Defense stocks including Lockheed Martin, Northrop Grumman and Huntington Ingalls are the most exposed by the crisis, while companies relying on government contracts for more than 95% of their business, including consulting firm Booz Allen Hamilton and Medicare servicer Oak Street Health, also may be in danger.

Key Background

2022 was the worst year for stocks since the depths of the Great Recession in 2008, with the Dow Jones Industrial Average, S&P and tech-heavy Nasdaq declining 9%, 19% and 33%, respectively. Though stocks are off to a hot start in 2023, with each major index up 3% to 7% year-to-date, numerous industry leaders cautioned about a potentially harsh year for stocks. Morgan Stanley’s chief investment officer Michael Wilson predicted the S&P may decline to as low as 3,000 in coming months, indicating 25% downside, while JPMorgan warned Friday of a “deterioration” in its economic forecast with a “mild recession” likely coming in the final months of 2023.

Tangent

Shares of Goldman dropped by as much as 6% in early Tuesday trading after the bank’s earnings fell far short of analyst expectations, with its latest quarterly profit of $1.3 billion down almost 70% from the same three-month period a year prior.

Crucial Quote

“Bear markets are like a Hall of Mirrors, designed to confuse us,” Wilson wrote in a Tuesday note.