Reuters / Frank Polich
- Goldman Sachs says company profits are going to slow, and strategist Ben Snider reveals his recommendations for how investors can still excel.
- Snider’s trades are built around the themes that have captured investors’ attention this year: The health of the US economy, interest rate policy, and rising uncertainty tied to the 2020 election cycle.
- Goldman’s chief US equity strategist, David Kostin, raised his targets for the S&P 500, but cut his profit forecasts at the same time. That underscores the importance of making the right picks.
- Click here for more BI Prime stories.
The combination of rising stock prices and weakening profit growth sounds dangerous, but Goldman Sachs isn’t telling investors to get out of the market. It says there are still opportunities available for those who know where to look.
Strategist Ben Snider examined three of the themes that traders and experts have focused on this year: (1) US economic growth, where he expects improvement; (2) interest rates, which might not fall as much as investors hope; and (3) US government policy, which remains a risk for health care and China-connected companies.
With those in mind, Snider compiled three distinct strategies he expects to thrive, each of which is pegged to a specific macro theme.
Snider’s tips comes amid a forecast shift from David Kostin, Goldman’s chief US equity strategist. He just raised his year-end S&P 500 forecast to 3,100, and now expects the equity benchmark to hit 3,400 by the end of 2020.
To contrast, Kostin lowered his corporate earnings forecast for 2019, as have many other experts. This divergence reinforces how important it is for investors to pick the types of companies that will be able to withstand profit pressures and continue to grow share prices.
Listed and unpacked below are Snider’s three strategies:
(1) Overweight industrials and transportation
Macro theme: Stronger economic growth is positive for companies exposed to manufacturing
Snider says the US economy is set to speed up again and expects new strength in the manufacturing sector, which has been struggling. He’s raising his rating on industrial stocks to "overweight" from "neutral" and is especially positive on transportation stocks, which would benefit from that renewed economic strength.
The chart below illustrates the reason for his upgrade. It shows that one of Goldman’s economic activity indicators has started to bounce back, and Snider says that when that indicator rises, cyclicals do better than more defensive stocks.
Goldman Sachs Global Investment Research
He also raised his rating on materials makers to "neutral" from "underweight."
(2) Bond proxies set to climb
Macro theme: Bond proxies could benefit as the Fed won’t cut interest rates as much as expected
Stocks have skyrocketed since the Federal Reserve signaled it was open to cutting interest rates, but Snider says investors are going to be disappointed, as he expects a total of two rate cuts while the market is projecting four of them.
That’s one reason he sees some opportunities among bond proxies, a group usually defined as real estate investment trusts, consumer staples makers, utilities and telecom service companies. He says the stocks in general are delivering surprisingly weak returns considering Treasury yields are low and falling and economic growth has been fading.
That weakness is shown in this chart.
Goldman Sachs Global Investment Research
Snider favors those bond proxies over Treasury notes and ultra-low volatility stocks.
"Buy a screen of stocks in bond proxy sectors that have lagged their typical betas to equities and rates vs. bond proxy stocks that have outperformed their betas," he writes.
Snider upgraded real estate investment trusts to "neutral" from "underweight" because they’ve struggled especially badly, and downgrades utility stocks to "underweight" from "neutral" since they’ve fared somewhat better.
(3) Avoiding election risk
Macro theme: Steer clear of exposure to health care and trade policy
Snider says the prospect of major health care reforms like Medicare for All plans will create trouble for health care stocks through the 2020 elections even if big shakeups for the industry aren’t that likely.
He downgraded the health care sector to "underweight" from "neutral" and says investors’ exposure to health care should come from health care providers and service companies instead of pharmaceutical companies.
"Be wary of stocks in industries that will likely feature in campaign proposals and industries with high exposure to US-China trade," he wrote.
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