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Stock selection for 2022 and investment advice from David Kostin of Goldman Sachs




  • Goldman Sachs chief U.S. equity strategist said the S&P 500 would hit 5,100 by the end of 2022.
  • Although stocks are at high valuations, David Kostin says investors don’t need to be too defensive.
  • It explains how they can react to sustained growth, rising costs and rising interest rates.

If there’s one thing investors want to hear about how stocks perform in 2022, it’s that big returns this year don’t rule out the possibility of strong returns in the new year.

“Contrary to the intuition of many investors, the stellar return of 26% year-to-date is not in itself a good reason to expect a low return in 2022,” wrote the chief strategist. of US Goldman Sachs stock David Kostin in a note to clients. He notes that historically, one-year periods of 20% returns tend to be followed by above-average performance.

Kostin expects the S&P 500 to rise 9% to 5,100 in 2022, which would deliver a 10% return including dividends. Including the effects of higher real interest rates, it’s just a little lower than its long-term average.

He adds that a mixture of faster economic growth and lower-than-expected inflation could push the benchmark stock index to 5,500 by the end of the year, while more inflation and less growth could push it down. reduce by 25%, to 3,500.

Kostin writes that much of the market’s gains in 2021 came from expansion in valuation, meaning investors were willing to pay more money for a constant amount of profit or income. This is unlikely to happen in 2022 as interest rates will rise.

“Historical experience during Fed tightening cycles suggests that further expansion in valuations is unlikely,” Kostin said. He has three big ideas for approaching this market.

(1) Post-pandemic, pro-inflation games

“Cyclical properties, including ‘reopening’ stocks and those exposed to recent headwinds in input costs that will benefit from accelerating economic growth in early 2022,” advises Kostin.

As an example, he says that consumer goods manufacturers, chemical companies, and companies with supply chains exposed to China have all beaten the market recently because shipping costs and Oil prices have stopped rising and “are stuck”.

“This momentum is expected to continue as investors believe the worst of these headwinds is over,” he wrote. “This cyclical tailwind is one of the reasons we are overweighting the financial sector. “

(2) Pay the cost if you are the boss

Wage growth hasn’t been so strong in decades, says Kostin, but it will remain strong going forward. He therefore warns investors to stay away from companies vulnerable to rising labor costs.

“Our economists expect strong demand for workers and limited supply to keep wage growth above 4% in the years to come,” he said. This isn’t a big deal for most large cap companies, but there are a few notable exceptions.

“Low-labor stocks in the leisure and hospitality sector have outperformed their high-labor-cost counterparts for most of this year,” he said. . “A basket of stocks with high labor costs relative to EBIT has lagged against the S&P 500 in recent months, just as it did when wage growth took off. reached a rate of over 3% in 2018 and 2019. “

(3) Growth stocks that make money

Kostin maintained a recommendation of “overweight” on technological actions, but says rising interest rates will draw a sharp line between companies that make a profit and those that don’t. He writes that profitable businesses are in better shape for the long haul.

“Stocks with ‘quality’ attributes such as high returns on capital, strong balance sheets and stable earnings growth have generally outperformed in similar past environments,” he said. “Growth stocks with high current profitability have comparatively shorter durations, and therefore less vulnerability to rising interest rates.”

These companies are also more vulnerable to mass sales after disappointing Wall Street, he said, as investors place big bets on their futures and can significantly recalibrate their expectations based on short-term developments.

Basic allowances

Kostin also improved health actions to “overweight” in addition to his banking upgrade and his optimism about technology. He said healthcare is expected to recover as the latest round of reform risks wears off.

“Healthcare is trading at depressed valuations which should recover as political risk eases,” he said. “It’s a rare industry that typically outperforms in environments where real rates push up nominal rates, which describes our economists’ forecast for most of 2022.”

In contrast, it assigns “Underweight” ratings to automobiles and automotive components companies because they are expensive, and said that investors should minimize exposure to a group of companies that will have difficulty in these economic conditions.

“Our economists’ forecasts for strong annualized US GDP growth of + 4.0% in the first half of 2022 suggest that it is too early for investors to turn fully to defensive sectors,” he said. he declares. “Basic consumption, Utilities, and Telecom Services generally struggles to outperform the index as interest rates rise. “




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