Analysts at Goldman Sachs emphasized that investors should focus “American exceptionalism” and own stocks with high domestic sales, in a recent note titled ‘Every client inquiry focused on the same four topics: global growth, FX, oil, and small-caps’.
Focus of discussions among investors
Goldman Sachs analyst David Kostin and his team made the recommendation after observing that the focus of discussions this week included the uneven global economic growth with the U.S. economy expanding above the trend, China’s slowdown and Europe’s weakness, and the strength of the U.S. dollar as well the rapid movement of the euro towards parity by 2017.
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
In addition, investors were also discussing the bearish crude oil market with Brent plummeting by over 20% since June and the disappointing returns of small-cap equities with the Russell 2000 index down by 13% year-to-date.
Goldman Sachs estimated S&P 500 to rise 7%
The analysts at Goldman Sachs pointed out the U.S. economy, and company fundamentals are still strong. Kostin and his fellow analysts estimated that the S&P 500 will grow 7% to 2,050 points.
Kostin and his team noted, “Buybacks have been the major source of demand for US equities during the past four years with S&P 500 firms repurchasing more than $1.5 trillion of shares.”
The analysts recognized the fact that the global economy lacks growth, but they pointed out that Goldman Sachs economists forecasted that gross domestic product (GDP) of the United States will expand 3.2% next year, the fastest expansion rate since 2005.
Goldman Sachs economists also estimated that the Euro area will grow by just 0.7% this year and 1% in 2015.
“US stocks with a high proportion of domestic sales have and should continue to benefit disproportionately relative to firms with a high share of foreign revenues,” according to Kostin and his fellow analysts.
Investors should focus on sectors benefiting from lower oil prices
According to the analysts at Goldman Sachs, investors should focus in sectors benefiting from lower oil prices. They believed that equities in the energy sector will continue to decline without an increase in crude price.
Kostin and his fellow analysts emphasized that certain non-energy sectors particularly Consumer Staples and Discretionary will benefit from lower oil prices. They explained that personal consumption rises as input costs decline. They also noted that airlines and chemical sectors are experiencing a reduction in input costs.
The Goldman Sachs analysts recommended that investors should overweight Consumer Discretionary and Industrials and stick with large-cap equities. In addition, Kostin and his fellow analysts emphasized that the combination of a strong dollar and positive US GDP growth often correspond to the outperformance of the Russell 2000.
“However, negative earnings revisions have actually increased small-cap valuations even as share prices have declined. The tight relationship between Russell 2000 relative performance and the slope of the US yield curve highlights the degree to which concerns over growth and Fed policy have biased investors toward the relative safety of large-caps,” according to the analysts.
Goldman Sachs said there are 43 stocks in the S&P 500 with high domestic sales exposure, beta to the U.S. economy and rebounding stock market and low valuation within the sectors. Hedge funds and mutual funds also rank those stocks as important positions.
Some of these stocks include Goodyear Tire & Rubber Company (NASDAQ:GT), Amazon.com, Inc. (NASDAQ:AMZN), General Motors Company (NYSE:GM), Tyson Foods, Inc. (NYSE:TSN) and Archer Daniels Midland Company (NYSE:ADM) among others.