A surprising segment of the stock market will rally the most on a COVID-19 vaccine, Goldman Sachs says
- Expect value stocks, not cyclical stocks, to rally the most from a COVID-19 vaccine, Goldman Sachs said in a note on Friday.
- As chances have increased that a successful COVID-19 vaccine will be developed, value stocks have rallied the most of any other group of stocks, the note highlighted.
- But while value stocks will likely stage a strong rally on a COVID-19 vaccine development, growth stocks should remain the favored pick for investors with a long-term investment horizon, Goldman said.
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As the world awaits a successful COVID-19 vaccine, investors are anticipating which stocks to buy to benefit off of the potential development.
And while many portfolio managers have mostly pointed to cyclical stocks as the main beneficiaries of a COVID-19 vaccine, Goldman Sachs argues instead for value stocks, according to a note published on Friday.
The consensus thinking goes that the hardest hit stocks like airlines, restaurants, and casinos are set to benefit the most from a vaccine as the economy fully reopens and consumers get out and spend money.
But recent performance dynamics suggest otherwise.
Between August 22 and September 8, the probability of a widely distributed COVID-19 vaccine surged by 30 percentage points, Goldman said, citing data from the Good Judgment Project. During that same time, cyclical stocks underperformed defensive stocks, while value stocks outperformed growth stocks by more than 3%.
"Cyclicals lagging while vaccine prospects are improving is certainly not what most investors would have predicted," Goldman said.
The reason for the moves, according to Goldman, is that today's value stocks "will experience the sharpest rebounds in earnings expectations once investors have confidence in the path to normalization," the note said.
Goldman added that the traditional economic sensitivity of an industry "is less relevant" when thinking about where earnings are likely to rebound after an effective vaccine is developed.
Adding fuel to the potential fire of value stocks' expected post-vaccine rally is the fact that value stocks trade at their largest discount to growth stocks since the tech bubble, according to Goldman.
This gap "represents the potential energy for value stocks to outperform with the right catalyst that generates a rotation," Goldman said.
So should investors shift their exposure from growth to value stocks? It depends on their investment time horizon, Goldman advised.
Low interest rates should continue to be a tailwind for growth stocks, and with the Fed's recent commentary suggesting interest rates will remain low for a number of years, don't expect this trend to end.
"In this lower-for-longer interest rate environment, we expect investors will continue to prize growth in the medium term," Goldman concluded.