Reuters / Lucas Jackson
- Goldman Sachs chief US equity strategist David Kostin says that with US-China trade tensions likely to drag on for a long time, investors need ways to identify stocks that can excel.
- Kostin says companies focused on the US service sector are well-positioned to benefit from economic trends and safe from the trade war, and while goods producers remain vulnerable to tariffs and a weakening global economy.
- He names 10 stocks to buy in the service group — along with 5 others that might benefit from ultra-low labor costs — and 10 to avoid in the goods sector.
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As rising trade tensions make the market increasingly wild, Goldman Sachs chief US equity strategist David Kostin is zeroing in on a potentially critical distinction separating the most vulnerable stocks from the least.
With an apparent breakdown in trade talks between the US and China, Kostin is part of a growing group on Wall Street that believes the sides probably won’t reach a trade deal before the 2020 Presidential election. That means investors might have to endure a lot of shocks like the ones from last week.
With that in mind, he draws a line between companies in the service sector and those that manufacture goods. He says that the first group are set to benefit from a string of supportive trends in the economy, and they’re relatively safe during the trade war.
"Services stocks (ticker: GSSBSERV) have faster sales and earnings growth and more stable gross margins than Goods firms (GSSBGOOD)," he writes, adding that there are numerous signs the consumer-focused parts of the US economy are in good shape.
In this chart, Kostin shows that those factors have already helped service companies. But despite the relatively high valuation of the stocks, he thinks the trends will continue to make the sector a better choice.
Goldman Sachs Global Investment Research
He identifies the 10 largest companies in the service basket as Microsoft, Amazon, Alphabet, Berkshire Hathaway, Facebook, JPMorgan Chase, Visa, Walmart, Mastercard, and Bank of America. Most have outperformed the S&P 500 index this year, with Facebook, Visa, and Microsoft notching especially large gains.
Kostin adds that he sees additional potential in services companies that have especially low labor costs. This is a strategy Goldman has suggested in the past because it expected wages to tick higher, and it’s only grown more confident in that idea.
"Modest growth combined with falling interest rates should put continued upward pressure on wages that have already accelerated to the fastest pace this cycle," Kostin writes.
He’s far more pessimistic about goods makers: They’re more likely to be hit with tariffs that sap their profits, and they’re more vulnerable to slower economic growth worldwide because they do more business outside the US.
"The US-China trade dispute has had a more negative impact on the fundamentals and share price performance of Goods-producing companies compared with Services-providing firms," he says.
The 10 largest names in the goods-producing group Kostin is warning investors away from are Apple, Johnson & Johnson, Exxon Mobil, Procter & Gamble, Chevron, Coca-Cola, Merck, Intel, Pfizer, and Boeing.
Of those, all except Pfizer are higher this year, but only Apple and Procter & Gamble have substantially beaten the market.
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