Value stocks will gain whether inflation peaks or the Fed tightens enough to spark a recession, Goldman Sachs said.
With the S&P 500 falling 14% year to date but rising 5% since just Sept. 6, you can make arguments for buying stocks or for staying away.
For those of you who plan to purchase stocks or at least keep them in your portfolio, Goldman Sachs strategists, led by David Kostin, offer these four insights to “drive performance” through year-end.
1. “Stocks with quality fundamental metrics will benefit, because tightening financial conditions and the increased cost of capital will constrain valuation expansion for the overall market,” the strategists wrote in a commentary.
2. “Value stocks will outperform under two scenarios – if inflation peaks in the near future and focus turns to the end of the hiking cycle, but also if the Fed tightens too much and the economy slips into recession.
3. “Dividends offer investors exposure to S&P 500 fundamental growth while minimizing exposure to equity valuation risk.
4. “Stocks with primarily domestic revenues will outperform companies with a high proportion of foreign sales.”
Rate Hikes
As for financial conditions, Goldman Sachs expects the Federal Reserve to lift interest rates by 75 basis points in September, 50 basis points in November and 25 basis points in December.
Looking at value stocks, “value has historically outperformed growth when inflation peaks and the Fed hiking cycle ends,” the strategists said.
But investors are concerned about recession. “And history shows value stocks outperform around the start of recessions,” they said.
Their baseline forecast calls for the S&P 500 index to end the year at 4,300. That’s up 5% from the afternoon of Sept. 12.
“Incorporated in our forecast are several important assumptions,” the strategists said.
· “The Fed’s forceful pace of tightening will lead to continued deceleration in economic growth during the next several months,
· “The 10-year Treasury yield will end the year roughly unchanged from the current level of 3.3%, and
· “The projected pace of 2023 S&P 500 earnings growth will equal 3%, versus 7% now.”
Troubles Overseas
As for the outlook overseas, “the path of U.S. growth may be uncertain, but the economic situation in Europe is dire,” the strategists said. Goldman Sachs expects recessions in both the U.K. and the euro area.
“Despite concerns that investors have about the U.S. equity market, we believe it offers greater absolute and risk-adjusted return potential than recession-plagued European markets,” the strategists said.
Goldman Sachs cites 25 stocks “in the long leg of our value factor that value-oriented mutual funds are most underweight.” Here are the top 10 starting with the most underweight.
1. Pfizer (PFE) – Get Pfizer Inc. Report, the drug giant.
2. AT&T (T) – Get AT&T Inc. Report, the telecommunications giant.
3. Moderna (MRNA) – Get Moderna Inc. Report, the biotech company.
4. Ford Motor (F) – Get Ford Motor Company Report, the auto titan.
5. Altria (MO) – Get Altria Group Inc. Report, the tobacco company.
6. Consolidated Edison (ED) – Get Consolidated Edison Inc. Report, a utility.
7. CVS Health (CVS) – Get CVS Health Corporation Report, the healthcare company.
8. Ventas (VTR) – Get Ventas Inc. Report, a real estate investment trust.
9. Micron Technology (MU) – Get Micron Technology Inc. Report, a semiconductor maker.
10. Nucor (NUE) – Get Nucor Corporation Report, a steel maker.
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