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  • Flat returns for the S&P 500 are hiding a serious drop in the market’s growth estimate.
  • Goldman Sachs is more bullish on the economy than its peers, but it still prefers defensive stocks.
  • Here are the six parts of the market that the firm is bullish on — and where it’s avoiding.

Stocks are stuck in limbo as investors struggle to reconcile resilient Q1 earnings reports with a strong sense that the US economy will enter a recession within the next year. The S&P 500 is virtually unchanged in April and has moved more than 1% in a day only two times this month.

But that unusual calm in markets may be masking serious concerns about economic growth, according to David Kostin, the chief US equity strategist at Goldman Sachs.

Investors have ditched economically sensitive stocks for their defensive counterparts in the last eight weeks, Kostin wrote in a late April note. Shares of cyclical companies have fallen 4% since the start of March, while stocks that are less reliant on growth have risen 4% in that span.

The performance disparity between cyclicals and defensives in the last few weeks suggests that growth expectations for the US economy have decreased, Kostin wrote. He noted that the market’s pricing of inflation-adjusted growth has been cut in half from over 2% to around 1%.

GS growth estimate halved

The return of cyclical stocks relative to defensives (in dark blue) implies that the market’s growth expectation has fallen from 2% to 1%, according to Goldman Sachs.

Goldman Sachs



“Mixed economic data and uncertainty around banking stress have led the equity market to downgrade its pricing of the US economic growth outlook in recent weeks,” Kostin wrote.

Besides last month’s banking sector stress, losses for economically sensitive stocks have been exacerbated by weak data for manufacturing and the labor market, Kostin noted.

However, Goldman Sachs hasn’t yet soured on the economy. While consensus estimates indicate a 65% chance of a recession in the next 12 months, Kostin wrote that his firm’s economists are still sticking with their 35% estimate. That optimism is especially noteworthy considering that even the Federal Reserve’s economic team is projecting a mild downturn later this year.

GS GDP estimate

Goldman Sachs’ GDP estimate (the blue-gray columns) is higher than that of the consensus (the black dots).

Goldman Sachs



6 ways to invest in this uncertain economy

Lower growth expectations will lead to continued outperformance for stocks in three defensive groups, Kostin wrote: healthcare, consumer staples, and telecommunication services.

“The uncertainty surrounding domestic economic growth informs our preferred sector positioning,” Kostin wrote.

Companies in the healthcare and staples sectors are more shielded from tighter financial conditions than their peers, Kostin wrote. And while telecommunication companies are exposed to that risk, he noted that the group is trading at beaten-down valuations relative to their history.

Another sector Goldman Sachs is bullish on is energy, even though it’s economically sensitive. Better-than-feared growth will cause oil prices to rally 23% in the next year and fuel earnings beats for energy stocks, in the firm’s view. Additionally, Kostin noted that the group is trading at one of the biggest discounts to the broader market in the last 30 years.

GS sector vals

The energy sector’s current price-to-earnings ratio (the dark blue dot on the far right) is one of the lowest multiples relative to the S&P 500 in the past three decades.

Goldman Sachs



“Energy trades at a discounted valuation and remains our preferred cyclical overweight,” Kostin wrote.

While Goldman Sachs only has overweight ratings on four groups, the firm recently upgraded the materials sector since it’s cheap, and the stocks in the sector will benefit from China’s strong economic recovery. Within materials, Kostin especially likes stocks in the metals & mining industry.

“We recommend investors own mining stocks, which are levered to China growth through rising metals prices,” Kostin wrote. The strategy chief also expects miners to benefit from the coming infrastructure spending boom and a spike in demand for metals needed for clean energy.

Goldman Sachs is also neutral on the following sectors and industries: software & services, financials, consumer discretionary (excluding autos & durables), utilities, real estate, and consumer durables & apparel. That last group was just downgraded from overweight after outperforming the S&P 500 by 25 percentage points since the start of the fourth quarter.

The Wall Street giant recommends steering clear of the following groups, which have an underweight rating since they’re expected to struggle in a weaker economy: technology hardware, industrials, media & entertainment, semiconductors, and automobiles & components.



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