Investment banking large, Goldman Sachs has cautioned buyers to not count on one other robust six months for stocks following S&P 500 ending the first half of the year up about 15%.
The financial institution mentioned on Friday that the inventory market is more likely to consolidate sideways for the remaining months of the year as buyers navigate greater rates of interest. With the 10-year US Treasury yield at present at 1.43%, Goldman believes it’ll climb to a cycle-high of 1.9% by the finish of 2021.
Bankrate’s senior financial analyst, Mark Hamrick, mentioned “One of the sources of uncertainty over the next year is Federal Reserve policy.”
“Or put another way, will the central bank boost interest rates sooner rather than later? That is a risk to be sure. But rising rates would be a logical response to a normalizing, post-crisis economy”, Hamrick mentioned.
According to Goldman Sachs, the anticipated rise in the rates of interest will doubtless weigh on excessive development stocks and profit cyclical stocks. To profit from the market setup going into year-end, the financial institution due to this fact recommends buyers purchase stocks which have quick period, excessive development funding ratios, and pricing energy.
Although lengthy period development stocks have outperformed their quick period worth inventory counterparts in latest weeks, Goldman Sachs expects a reversal, particularly if its forecast for greater rates of interest materializes.
Some well-known stocks in Goldman’s quick period basket embrace Ford, CVS, Intel, and AT&T.
“Companies that have consistently invested for growth have outperformed the S&P 500 year-to-date and are best positioned to continue growing despite the expected slowdown in economic activity,” Goldman mentioned in a be aware.
Some well-known stocks in Goldman’s excessive development funding ratios basket embrace Facebook, Alphabet, General Motors, and Costco.
“We recommend investors focus on stocks with high pricing power as demonstrated by their high and stable gross margins. High pricing power stocks outperformed in 2018 – 2019 as wage growth accelerated and profit margins declined,” Goldman mentioned.
Some well-known stocks in Goldman’s excessive pricing energy basket embrace Activision Blizzard, Etsy, Procter & Gamble, and Adobe.
Goldman outlined its expectations that whereas the S&P 500 will finish the year at 4,300, it’ll leap 7% to 4,600 by the finish of 2022 as the unemployment charge falls to three.5%.
“Our year-end [S&P 500] price targets remain 4300 for 2021 (+3% from today) and 4600 for 2022 (+7% vs. 2021), reflecting our expectation that US equities will continue to appreciate, albeit at a slower pace than has characterized the past 12 months,” Goldman Sachs analyst David Kostin mentioned in a May 14 analysis report.
He added that equities would stay enticing relative to money and bonds, at the same time as buyers preserve the pickup in inflation at the forefront of their minds.
“Investors have taken notice; our screen of stocks with high pricing power has outperformed our low pricing screen by 7 pp since the middle of March,” Kostin mentioned.