Goldman Sachs says you should own these stocks in the second half of the year

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Investment banking giant, Goldman Sachs has cautioned investors not to expect another strong six months for stocks following S&P 500 finishing the first half of the year up about 15%.

The bank said on Friday that the stock market is likely to consolidate sideways for the remaining months of the year as investors navigate higher interest rates. With the 10-year US Treasury yield currently at 1.43%, Goldman believes it will climb to a cycle-high of 1.9% by the end of 2021.

Bankrate’s senior economic analyst, Mark Hamrick, said “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 said.

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According to Goldman Sachs, the expected rise in the interest rates will likely weigh on high growth stocks and benefit cyclical stocks. To benefit from the market setup going into year-end, the bank therefore recommends investors buy stocks that have short duration, high growth investment ratios, and pricing power.

Although long duration growth stocks have outperformed their short duration value stock counterparts in recent weeks, Goldman Sachs expects a reversal, especially if its forecast for higher interest rates materializes.

Some well-known stocks in Goldman’s short duration basket include 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 said in a note.

Some well-known stocks in Goldman’s high growth investment ratios basket include Facebook, Alphabet, General Motors, and Costco.

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“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 said.

Some well-known stocks in Goldman’s high pricing power basket include Activision Blizzard, Etsy, Procter & Gamble, and Adobe.

Goldman outlined its expectations that while the S&P 500 will end the year at 4,300, it will jump 7% to 4,600 by the end of 2022 as the unemployment rate falls to 3.5%.

“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 said in a May 14 research report.

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He added that equities would remain attractive relative to cash and bonds, even as investors keep 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 said.