A June 11th report from Goldman Sachs Portfolio Strategy Research highlights the sector implications of faster growth in the US economy, higher interest rates and a stronger dollar.
GS analyst Elad Pashtan and colleagues summarize their current sector recommendations: “We recommend investors overweight Information Technology and Financials. These sectors provide a combination of growth at reasonable valuations, and outperform when interest rates rise and economic growth accelerates. Underweight Energy, Consumer Staples, Materials, and Utilities, as lower oil prices, a stronger USD, rising rates, and a flattening yield curve will constrain returns.”
IT and financials to lead to the way in 2015 as US economy starts to kick into second gear
Pashtan et al. argue that the information technology and financial sectors will be the key beneficiaries of accelerating US economic growth and the accompanying increase in interest rates. IT has historically been one of the top performing sectors during periods of solid economic growth, and financials will see earnings benefits as interest rates move up from their current very low levels. Consensus forecasts are that the technology and financials sectors will boost 2015 EPS by 9% and 11%, respectively, relative to only 2% for the S&P 500.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
The GS analysts believe the main risk to their IT overweight recommendation is a significant appreciation in the dollar as 60% of revenues are garnered overseas, while financials will disappoint if the economy doesn’t pick up and the Fed does not increase interest rates.
From a thematic perspective, the Goldman Sachs report suggests “…cyclicals will outperform defensives and value stocks will outperform growth as US economic growth accelerates from anemic 1Q levels. Our cyclical sector basket historically outperforms defensives during periods of accelerating growth. Info Tech and Financials comprise 58% of the total weight of our cyclicals basket. Value stocks typically outperform growth when US economic growth accelerates, and Financials comprise 30% of the Russell 1000 Value index.”
GS recommended IT stocks
As the US economy recovers, Pashtan and colleagues highlight several IT stocks that are likely to outperform over the next few quarters. Recommended IT stocks include: Autodesk, Western Digital, Apple, salesforce.com, Cisco, Facebook, Cognizant, Lam Research, Applied Materials and EMC.
GS recommended financial stocks
Recommended stocks in the financial sector include: BlackRock, Allstate, Hartford, CBRE, Affiliated Managers Group, Discover, American Express, Capital One, E*TRADE and SunTrust.