Goldman is betting on Walmart and McDonald's stock. Why is this a bad sign for the economy?

Investment bank Goldman Sachs has added Walmart and McDonald's securities to its list of best investment ideas. This is a worrying sign for the U.S. economy as declining consumer confidence leads consumers to the economy goods and services segment, Barron's notes. This was also shown by the latest report from discounter Dollar Tree, which expects sales to rise as more Americans, including those with high incomes, resort to budget shopping.

The worsening economic situation may play into the hands of stocks of companies like McDonald's and Walmart, according to a Goldman Sachs research note cited by Barron's. The investment bank added the shares of these companies to its Conviction List - a list of 22 best investment ideas.

Despite the rise in the stock market, most Americans remain pessimistic about the state of the economy, the publication explains. The University of Michigan's Consumer Confidence Index in August totaled 58.2 points - up from the spring level, but still one of the lowest readings in a decade. And according to a recent survey by The Wall Street Journal, the share of Americans who believe they have a chance to improve their financial situation has reached its lowest level since the 1980s. In this environment, consumers are cutting back on spending and turning to budget-friendly goods and services.

In favor of the hypothesis of Goldman Sachs analysts speaks the fresh report of budget retailer Dollar Tree. The company raised its annual forecasts for sales and profits, as more and more Americans, including those with high incomes, prefer to cut costs amid uncertainty over duties.

The fast-food restaurant chain is still lagging the market: according to FactSet, McDonald's shares have added just 32% over the past three years, while the market as a whole is up 72%. The fast food sector is struggling: rising labor and product costs have forced companies to raise prices, and inflation, in turn, has reduced customers' ability to pay.

Still, McDonald's beat analysts' expectations in the second quarter. And on September 2, the company said it will return to the menu affordable combo sets (Extra Value Meals), such as breakfast with a sausage for $5 and lunch with a Big Mac for $8, to attract more frugal consumers. Against that backdrop, the stock rose nearly 1% in mid-trading.

Goldman believes the current macroeconomic environment favors the company. "McDonald's has the scale, marketing and digital reach that will help it successfully navigate through consumer market uncertainty," the bank's analysts wrote. Their target price on the stock is $355, which is 16% above the securities' current value.

The largest retailer in the US is showing strong results. This is due, in particular, to the rapid growth of online sales, Barron's specifies. Over the past three years, the company's shares have risen 129%, outperforming the broad market index. The stock now trades at a ratio of the current market share price to projected earnings per share for the next 12 months (P/E) of almost 35 - a high in more than two decades.

Goldman set a $114 target price on Walmart securities, 16% above the current share price. "With its everyday low price strategy, Walmart is well positioned to continue to win back share in a retail market that is facing rising costs due to new duties," the analysts said in a note.

This article was AI-translated and verified by a human editor