- Goldman Sachs analysts released their quarterly US chartbook, which reiterates a S&P 500 target of 4,300.
- The target suggests a challenging trading environment for the second half of the year.
- We break down the analysts’ top tips to trade the environment and their 20 picks with most upside potential.
- See more stories on Insider’s business page.
The first half of this year has been fairly epic for equity and commodity investors, as a recovering global economy has pushed stocks and many key raw material prices to record highs. And that’s not even including the boom in cryptocurrency trading.
But the second half of this year is unlikely to prove to be quite such a one-way street, according to Goldman Sachs.
The analysts still have a year-end price target of 4,300 on the S&P 500, which closed at 4,352 on July 2. This suggests that trading in the second half of the year will be, at best, flat compared to where the market is right now, but the index is more likely to decline.
“From a valuation perspective, equities during the next six months are more likely to experience multiple contraction than expansion,” said Goldman Sachs analyst David Kostin, in a July 2 note.
“We assume that recent elevated inflation will be transitory, rates will rise to 1.9%, and part of President Biden’s tax proposal will be passed into law in 2021 and implemented in 2022,” he said.
In the US quarterly chartbook released on July 2, Kostin and his team take a look at the first half of this year and, more closely, at the second quarter, which they say has been a tale of two parts.
“S&P 500 rallied by 8.5% during 2Q and has returned 16% YTD to reach a new high of 4350,” Kostin said.
The team found that value stocks dramatically outperformed growth stocks for the majority of the first half of the year, but witnessed a major reversal in the past six weeks. The S&P Value index gained 10% in the first quarter of 2021, compared with a rise of just 4.7% in the S&P Growth index. By the end of the second quarter, however, both indices had risen by around 15%.
Energy and financials were two of the best sectors for returns in the first half of the year, while hedge funds, gold and fixed income lagged.
Whereas Goldman Sachs US Weekly Kickstarts, also released on July 2, provides some insight into how investors should be playing what the bank expects to be a “flat” market for the remainder of the year.
Playing a challenging near-term environment
1) Using options
Higher interest rates and tax reform could limit near-term upside, Kostin said,
“Use options to capitalize on record high skew,” he said.
If headwinds, such as rising bond yields, fail to materialize, the analysts expect the S&P 500 year-end target would be 5% or more. Investors could take advantages of elevated downside implied volatility through options, Kostin said,
2) Pay attention to trajectory of bond yields
“Every investor needs to have a view regarding the forward trajectory of bond yields,” Kostin said.
The analysts believe bond yields will remain central in the second half of the year.
As yields rise, short duration stocks should outperform long duration.
“Tactically, the long/short ‘duration trade’ was dramatic in both fixed income and equity markets during 1H and is likely to be a major theme in 2H as well,” Kostin said.
Since the start of the year, the benchmark 10-year US Treasury yield has risen to around 1.46% from closer to 0.91% at the end of 2021. But it’s retreated from March’s 14-month high of 1.77%.
3) Growth and pricing power stocks will be winners
Companies with either high growth investment ratios or high pricing power will also outperform, even if inflation does prove transitory, as the bank expects.
“Strategically, we expect decelerating economic growth will support the outperformance of growth versus value in late 2H and into 2022, but the trade will remain volatile in the near-term,” Kostin said.
Also the current low return dispersion presents “skillful stock-pickers with alpha opportunity.”
In the chartbook, Goldman Sachs analysts list the names they believe hold the most upside potential for stock pickers right now. All of them are rated a buy.
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