GOLDMAN SACHS: Stocks will come roaring back, but the game has changed - here are the 3 best investing strategies for the new era
- As Wall Street combs through the wreckage of the recent stock market sell-off, the message being conveyed is more somber and defensive than it's been following past meltdowns.
- Goldman Sachs is still constructive on equities into year-end, but recognizes that the landscape for stock investors has changed.
- The firm highlights three areas of the equity market that still offer great opportunity for traders, even amid the new circumstances.
Something has changed in the stock market.
As Wall Street experts comb through the wreckage that's piled up over the past few weeks, many are still constructive on equities. But their tone has turned somber. They may be forecasting a rebound into year-end, but the strategies they're espousing have gotten noticeably defensive.
Their commentary has taken on a different tone than it did following other recent market blow-ups, which were inevitably followed by strong periods of recovery. Rather than shrug off the pressures that led to the recent sell-off, strategists are acknowledging them and recommending strategies to circumvent them.
Goldman Sachs is one example of such a firm. In a recent note to clients, chief US equity strategist David Kostin was upfront about the pressures facing US stocks: expectations of an economic growth slowdown, unforgiving reactions to quarterly earnings, and narrowing market breadth.
Yet Kostin is still on stocks in the near-term, largely because he thinks sellers have gone too far.
"The recent sell-off has priced too sharp of a near-term growth slowdown," said Kostin. "We expected continued economic and earnings growth will support a rebound in the S&P 500."
Kostin also notes that narrow breadth - which implies that broader market moves are being determined by just a small number of stocks - hasn't always been a long-term negative for equities.
He cites the periods around 1998 and 2006 as examples, nothing that the S&P 500 saw positive returns in the six months following those periods of deteriorating breadth.
"The market was too early in its assessment of the end of the economy cycle," Kostin said about those two instances.
But even if the market as a whole isn't necessarily doomed, the aforementioned issues facing investors may require a change in strategy, according to Goldman.
So what's the best approach? Kostin lays out three:
(1) Buy stocks with strong balance sheets
Goldman readily acknowledges that near-record corporate leverage and tightening financial conditions are likely to weigh on share prices going forward. The best way to combat that is to buy stock in companies that have low debt burdens and strong cash flow - otherwise known as strong balance sheet firms.
"Firms with strong balance sheets have typically outperformed weak balance sheet stocks during economic downturns," Goldman wrote in a recent note.
Examples: FB, NVDA, CMG, HD, COST
(2) Buy stocks with high and stable gross margins
These types of companies are best positioned to pass through higher input costs, which result from higher tariffs worldwide.
"Firms with high and stable gross margins are well-positioned to withstand input cost inflation," said Goldman.
Examples: NATI, WAT, VMW, IDXX, XYL
(3) Buy "high-quality" stocks
This would seem to be an obvious suggestion - buy quality companies, then profit. But this group hasn't always outperformed during the nearly 10-year bull market.
However, this would appear to be their time to shine as investor focus shifts more towards corporate fundamentals, and away from market momentum.
Featuring firms with strong balance sheets, stable sales and EPS growth, high ROE, and low historical drawdown risk, Goldman notes that the group has already started beating the broader market since investor nerves have gotten frayed. The chart below reflects this.
Examples: ORLY, ROST, MA, V, ECL
