I doubt I’m telling readers anything they don’t already know when I say year-ahead outlook pieces from Wall Street should be taken with a grain (and quite possibly a whole shaker) of salt.

That’s certainly not to disparage the best efforts of the sell-side’s legions of strategists. Their analytical exercises do serve a purpose even if, on some days, I can’t readily identify what that purpose actually is (Charlie Munger is laughing somewhere).

On Wednesday, Goldman’s David Kostin suggested the best strategy for 2024 is simply to stay invested. That’s never a bad idea. We’ve all seen simulations quantifying the hypothetical pitfalls of missing the best rallies while trying to dodge the worst declines: Market timing is perilous and not generally conducive to long-term success.

But Kostin wouldn’t be doing himself or his peers around the Street any favors by releasing a two-sentence year-ahead outlook that just said “Stay invested. Historically, buy-and-hold is the most reliable route to wealth-building in equities.” That’d raise existential questions about the value of highly-paid equity strategy teams whose every written word is (wittingly or not) an effort to testify to their own usefulness.

So, instead of two sentences, Kostin (and Ben Snider and Ryan Hammond and Cormac Conners and Lily Calcagnini and Jenny Ma and Daniel Chavez) carried on for 39 whole pages aided by more than 50 charts and tables.

Despite the lackluster, cash-like return Kostin forecasts for the broad index (5%, 6% with dividends), he sees “more attractive investment opportunities beneath the surface.” Goldman highlighted three such opportunities.

First, the bank said that notwithstanding what should be a resilient US economy, investors will likely remain concerned about a recession, supporting the case for owning quality stocks which could benefit from “late-cycle anxiety.” Second, Kostin suggested that in the event market pricing for growth and rate outcomes doesn’t shift dramatically, growth stocks with high returns should do well. Third, beaten-down cyclicals could outperform if the economy holds up better than consensus expects (you’re reminded that economists still put the odds of a US recession at a coin toss over the next 12 months).

The figure above summarizes Goldman’s recommendations.

Naturally, Kostin laid out alternative scenarios (not to be confused with “alternative facts”) to the bank’s baseline. Everybody has to have a baseline, a bull case and a bear case.

For Goldman, the bull case is faster growth and lower yields. Here, according to Kostin, is how that would play out in equities:

In a scenario where inflation and bond yields fall more quickly than we expect but growth remains strong, we expect the S&P 500 would end 2024 at 5000 (+11%). The relief from peak and falling bond yields would more closely mirror the historical playbook at the end of Fed hiking cycles, with valuations expanding modestly to 19x. Equity returns would also benefit from more rapid economic and earnings growth. At 5000, the index would trade 4% above the January 2022 all-time high of nearly 4800.

The opposite of faster growth and lower yields is lower growth and higher yields. That’d be suboptimal. Here’s Kostin again:

In a scenario where the economy manages to avoid a recession but bond yields rise by more than we expect, we forecast the S&P 500 would end 2024 at 4150 (-8%). The resulting slowdown in economic and earnings growth would be exacerbated by valuation contraction in the higher interest rate environment. This backdrop could prove particularly challenging for the mega-cap tech stocks, which tend to be longer duration equities and well-owned among hedge funds, although the strength of their balance sheets would likely provide some insulation.

Finally, it’s possible the US could succumb to a recession although Jan Hatzius contends the odds of that are exceedingly low (15%). In the event of a recession, the S&P would likely fall 18%. Kostin sketched that scenario as follows:

In a recession, we expect the S&P 500 would end 2024 at 3700 (-18%). Although not our baseline, we consider a relatively mild recession scenario. If a recession materializes and real GDP contracts, it would likely lead to a 15% decline in EPS in 2024, before rebounding by 9% in 2025. However, consensus estimates would be cut more gradually, with 2025 EPS estimates declining to roughly halfway between today’s bottom-up consensus estimate of $273 and our recession scenario EPS of $209. We also assume the Fed would respond to the recession by easing the policy rate, leading real yields lower and cushioning the potential valuation decline. We forecast the S&P 500 P/E would contract to 15x. For historical context, during prior economic downturns S&P 500 EPS experienced a peak-to-trough decline of 11% and the index level typically fell by 24%, although prices and valuations typically bottom faster than earnings.

Those scenarios should be juxtaposed with the bank’s baseline, discussed here briefly on Wednesday morning.

The figure below, presented without further comment, is a summary of Goldman’s base case and the alternative outcomes as described above.