Goldman Says America’s Stocks Are Worth Less, But There’s A Silver Lining

Goldman Says America’s Stocks Are Worth Less, But There’s A Silver Lining
Carl Hazeley

almost 2 years ago3 mins

  • Goldman Sachs cut its S&P 500 forecast by 4% due to higher commodity prices and lower economic growth.

  • Nevertheless, US energy and healthcare stocks seem attractive right now: they’re both cheap relative to history and have tailwinds supporting their earnings.

  • Stocks that pay high dividends look good right now too: Goldman thinks investors are too pessimistic here, and that creates an opportunity.

Goldman Sachs cut its S&P 500 forecast by 4% due to higher commodity prices and lower economic growth.

Nevertheless, US energy and healthcare stocks seem attractive right now: they’re both cheap relative to history and have tailwinds supporting their earnings.

Stocks that pay high dividends look good right now too: Goldman thinks investors are too pessimistic here, and that creates an opportunity.

Mentioned in story

Last week, Goldman Sachs cut its S&P 500 forecast by 4%. The bank now sees the key US stock market index ending the year just 10% above its current level. That may sound like bad news, but there’s a silver lining: three pockets of opportunity where you can profit.

Here’s what Goldman sees and why

A lower earnings outlook…

It looks like high commodity prices will be around for a while yet. That’ll keep pressure on consumer spending, meaning less demand in consumer sectors. And seeing as companies in those sectors will also be facing higher costs of their own, their profit margins – and, therefore, earnings – will take a hit

Industrial firms are likely to suffer too, given those higher commodity prices and resultant lower economic growth. The energy sector, meanwhile, will benefit from higher oil prices – and that’ll partly offset lower earnings growth elsewhere. Putting it all together, Goldman sees just 5% earnings growth in 2022 compared to 2021. That’s down from its previous forecast of 8%, and below average analyst estimates.

Breakdown of Goldman Sachs S&P 500 earnings estimate changes.
Breakdown of Goldman Sachs S&P 500 earnings estimate changes.

… with a slight recovery in valuations…

Goldman’s new S&P 500 year-end forecast implies a forward price-to-earnings ratio of 20x. That’s above the current one of 19x, but below the 21x we saw at the start of the year. In other words, the firm believes that US stocks were too expensive at the start of this year, but that right now – on average – they’re perhaps a little too cheap.

…and rising expectations of a recession that might not happen.

Higher commodity prices, rising interest rates, slower global economic growth, and weaker consumer spending all mean the US economy’s likely to grow more slowly than earlier predicted. Goldman’seconomists, for one, now expect the US to grow 2.9% this year – down from 3.2%, and 3.8% before that.

At the same time, those economists see a 20-35% probability of a US recession in the next year. That’s below the roughly 40% chance that investors seem to be “pricing in” to markets at the moment. And that could present a buying opportunity if no recession comes to pass.

What’s the opportunity here?

Goldman recommends investors buy into the energy and healthcare sectors – where stocks are looking cheap relative to history – as well as high-dividend paying stocks.

Energy stocks should benefit from the continued supply-demand imbalance for oil: they typically track the price of the slippery elixir, and it's been rising of late. The Energy Select Sector SPDR Fund (ticker: XLE, expense ratio: 0.1%) is one of the cheapest options to gain exposure to US energy companies.

US energy

Healthcare stocks are defensive, so they should be relatively resilient to a slowdown in economic growth and inflationary pressure. That’s because healthcare companies have strong pricing power and stable demand (health issues don’t go away with a recession). The Health Care Select Sector SPDR Fund (ticker: XLV, expense ratio: 0.1%) is one of the cheapest options to gain exposure to US healthcare companies.

US healthcare

S&P 500 dividend payments have grown 10% compared to this time last year, but futures prices show them growing by just 4% in 2022. During every recession since 1949, dividends have fallen – from peak to trough – by an average of just 3%. So investors might be too pessimistic: the largest US companies generally have healthy cash flows and high cash reserves, after all.

The SPDR S&P US Dividend Aristocrats UCITS ETF (ticker: USDV, expense ratio: 0.35%) gives you access to S&P 500 companies that have consistently increased their dividend payments for at least the last 25 years.

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