A higher-for-longer interest rate regime could continue to pressure the broader stock market, leaving investors to focus on companies offering the most stable earnings growth that thrive in times of economic weakness, according to Goldman Sachs. “We expect equities will struggle to find their footing if rates continue to rise sharply,” David Kostin, Goldman’s head of U.S. equity strategy, wrote in a recent report. “Stocks with stable growth typically perform best alongside decelerating economic growth.” The latest inflation news has pointed to stubborn price pressures that the market has decided will make the Federal Reserve hold interest rates higher for longer. Meanwhile, economic activity appears to be slowing as real gross domestic product growth eased to a 1.6% pace, below economists’ consensus estimate. After starting the year forecasting at least six reductions, the market is now down to expecting one rate cut, according to the CME Group’s widely followed FedWatch tracker that imputes probabilities based on fed funds futures contracts. The S & P 500 has fallen about 3% from its 52-week high after rallying to records in late March. In this economic climate, Goldman is advising clients to buy stocks offering stable growth. The Wall Street bank screened Russell 1000 stocks for those with the most stable growth in earnings before taxes, depreciation and amortization on a quarterly basis over the past 10 years. “Should the outlook for earnings growth deteriorate, the recent stretch of quality outperformance will likely continue and also expand to include stocks with stable growth,” Goldman said. The screen turned up several consumer staples companies, including PepsiCo and Colgate-Palmolive. These stocks tend to be noncyclical, meaning they are largely insulated from how well or how poorly the economy is doing. Industrial companies such as Waste Management and Fastenal also made the list, as well as consumer discretionary names Domino’s Pizza and AutoZone .
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