Inflation in the US has been much higher than economists expected. More investors are now worried about the possibility that the Fed will overreact, raising interest rates so much that it pushes the economy and stock investing into the feared recession. For this reason, the investment bank Goldman Sachs has analyzed how far the situation could go for investment in US stocks.
How bad does the situation look for investing in US stocks?️
Investors expected the inflation The US economy would have turned around and started to relax this summer, but in June the situation only heated up more. A growing number of them are now betting that the US Federal Reserve (Fed) will raise interest rates by one percentage point next week to continue trying to combat inflation.
The growth expectation for investment in US stocks contracted 1,6% in the first quarter of the year. Current forecasts suggest that it will not contract again in the second quarter, avoiding a "technical recession" for now. But investors' concern is that rising interest rates will drag down borrowing and spending, and push the economy into a recession in any case. In other words, a recession seems almost inevitable.
What does this mean for American companies?吝
According to Goldman's scenario analysis, the earnings of S&P 500 companies, as measured by earnings per share (EPS), would fall 11% in 2023 compared to the level of 2022. That is if investment in US stocks contracts modestly next year, that is, if a moderate recession occurs. Goldman sees a 30% chance of a US recession in the next year and a 50% chance in the next two years. However, the Fed is willing to push these odds higher.
For context, in the eight US recessions since 1970, returns from investing in S&P 500 stocks have fallen an average of 14%. An 11% drop in profits would be consistent with a modest contraction of the economy. Goldman estimates that revenues for S&P 500 companies will remain fairly stable in a recession, but that shrinking profit margins would be responsible for the decline in EPS.
As for individual industries, investing in stocks cyclical sectors They typically experience the largest profit losses in a recession. This means that investing in consumer discretionary, industrial and materials stocks will likely be affected. On the other hand, investing in shares defensive sectors They justify their name. Utilities, healthcare, and consumer staples typically increase profits during recessions. This time, some consumer staples companies won't be so lucky. High inflation has driven up costs, meaning profit margins, and therefore profits, will likely fall.
What does this mean for investing in US stocks?⚖️
In Goldman's recession scenario, the S&P 500 would fall to 3.150 points by the end of 2022, which would be a 17% decline from its current level. If the bank is right, we would see a “peak-to-trough” price drop of 34%. This is worse than the historical recession average of 30%, but is in line with the average bear market decline since World War II. For context, Goldman's current S&P 500 forecast for the end of the year is 4.300, or 14% higher than current levels.
What opportunity do we have here?
What is clear is that, in a recession, investing in stocks in defensive sectors generally tends to generate the best results. And if more and more investors believe one is coming, then it may already be here when it comes to the stock market. Therefore, we may move our investment in US stocks towards the utilities, healthcare and consumer staples sectors. There are countless exchange-traded funds (ETFs) that can help us, but these three are the ones that can offer us the best profitability: Vanguard Utilities ETF (VPU), Vanguard Health Care ETF (VHT) and Vanguard Consumer Staples ETF (VDC).
But the higher relative benefit that these sectors can offer us may disappoint us, as they could fall in absolute terms. One way to try to generate an absolute profit is to make our investment in shares or ETFs of defensive companies or sectors and short the S&P 500. In this way, we will benefit from the difference in profitability between the two.