(Adds news of Ecolab's credit downgrade.)BOSTON ( TheStreet) -- Goldman Sachs ( GS) has a gloomy outlook for the coming year, as indicated by the title of its report on the U.S. equity market in 2012: "Strategies for Stagnation." The conclusion: Expect more of the same. Goldman's analysts put their Dec. 31, 2012, price target on the benchmark S&P 500 Index at 1,250 -- 2 points lower than yesterday's 1,252. The report is different than the well-known conviction-buy list the bank publishes. The analysts also expect that the U.S. economy will post its fifth consecutive year of stagnation, with GDP growth of a pedestrian 1.5% in 2012 and 2.2% in 2013. The unemployment rate will remain at about 9% through 2013, also little changed, the analysts say. That's better than in Europe, which will be in a recession for most of 2012, they predict. "The status of the euro is questionable," Goldman said in the December report. Corporate earnings growth will be tepid, as Goldman analysts forecast operating earnings per share of S&P members of $100 in 2012, after closing out 2011 at $97. Profit margins will slip from a peak of 8.9% in 2011 to 8.7% next year. Expect operating earnings of $106 per share for 2013, Goldman says. A slight positive is that net inflows into U.S. equities in 2012 will be about $500 billion, as share buybacks will help offset the continued outflow of funds from battered retail investors. But not everyone is as bleak as Goldman. S&P Capital IQ's Investment Policy Committee voted to raise its 12-month price target for the S&P 500 to 1400 from 1360, the firm said Wednesday, "reflecting a continued improvement in U.S. economic data and the belief that this correction concluded with the S&P 500's early October low near 1100." Defensive sectors, including consumer staples, telecommunications services and information technology, should outperform all other sectors given the weak economic backdrop, Goldman says. The firm offers five strategies for dealing with "stagnation," including four types of stock baskets and the use of equity options to boost performance. Its suggested "high quality" portfolio basket would seem to be the one that would put most investors at ease, given the potential volatily caused by the high geopolitical and policy uncertainty ahead and a struggling economy. In this case, Goldman analyzed stocks using various financial screens to come up with a "buy" list of 50 S&P 500 stocks that it ranked with a "quality score." Among the criteria it gave the greatest weight to in this group was "safe balance sheets and stable growth." The following is a list of Goldman's top 10 picks from its "high quality" portfolio, from the 10th-ranked score to the highest:
Coach ( COH), a retailer of high-end luxury handbags and leather accessories, gets a quality score of 87 from Goldman. Analysts estimate the company will grow earnings 16% in 2012. Its shares have a three-year average annual return of 49%, giving the company a market value of $17 billion. The shares carry a 1.5% dividend yield.
Walgreen ( WAG), the nation's largest retail drugstore chain with about 7,700 stores, earned a quality score of 88 from Goldman. Its earnings growth rate next year is estimated at 8% per share. Its shares have a three-year average annual return of 11.5%, giving Walgreen's a market value of $29 billion. Its shares carry a dividend yield of 2.8%.
TJX Cos. ( TJX), the country's biggest off-price retailer, is Goldman's top pick in the consumer-discretionary sector, with a quality score of 89. The company, which operates the T.J. Maxx, Marshalls and HomeGoods store chains, is expected to see 13% earnings per share growth in 2012, according to Goldman. Its shares have a three-year average annual return of 48%, giving the company a market value of $22 billion. Its shares have a 1.3% projected dividend yield.
St. Jude Medical ( STJ), a maker of a range of cardiovascular medical devices, including the world's most widely used mechanical heart valve, is Goldman's top health-care pick, with a quality score of 89. Its projected earnings growth for next year is 9%. St. Jude has a three-year average annual return of 6.6%, giving it a market value of $11 billion.
Ecolab ( ECL), a producer of cleaning and sanitation products for the hospitality and health-care markets, gets Goldman's highest ranking of all 50 stocks, with a quality score of 94. It's expected to post earnings growth of 17% in 2012. S&P downgraded Ecolab two notches Monday, saying its acquisition of Nalco Holdings last week increased its debt leverage and that, along with a $1 billion share buyback program, is expected to raise the company's financial risk. S&P now rates Ecolab at triple-B-plus. Its outlook is stable. Ecolab's shares have a three-year average annual return of 16%, resulting in a market value of $12 billion.