Investors should not expect another strong six months for stocks after the S&P 500 finished the first half of the year up about 15%, Goldman Sachs said in a note on Friday.
Instead, the stock market is likely to consolidate sideways for the next six months as investors navigate higher interest rates. With the 10-year US Treasury yield currently at 1.43%, Goldman expects it to climb to a cycle-high of 1.9% by the end of the year.
That expected surge in interest rates will likely weigh on high growth stocks and benefit cyclical stocks, the bank said. To benefit from the market setup going into year-end, Goldman recommends investors buy stocks that have short duration, high growth investment ratios, and pricing power, according to the note.
While long duration growth stocks have outperformed their short duration value stock counterparts in recent weeks, Goldman expects this trade to reverse, especially if its forecast for higher interest rates materializes.
Some well-known stocks in Goldman’s short duration basket include Ford, CVS, Intel, and AT&T.
“Companies that have consistently invested for growth have outperformed the S&P 500 year-to-date and are best positioned to continue growing despite the expected slowdown in economic activity,” Goldman said.
Some well-known stocks in Goldman’s high growth investment ratios basket include Facebook, Alphabet, General Motors, and Costco.
“We recommend investors focus on stocks with high pricing power as demonstrated by their high and stable gross margins. High pricing power stocks outperformed in 2018 – 2019 as wage growth accelerated and profit margins declined,” Goldman explained.
Some well-known stocks in Goldman’s high pricing power basket include Activision Blizzard, Etsy, Procter & Gamble, and Adobe.
Goldman outlined its expectations that while the S&P 500 will end the year at 4,300, it will jump 7% to 4,600 by the end of 2022 as the unemployment rate falls to 3.5%.
