Size of the text
NEW YORK, NY – FEBRUARY 25: Traders work through the last minutes of trading Tuesday on the floor of the New York Stock Exchange in New York City on February 25, 2020. The financial market dropped Tuesday, with the Dow Jones Industrial Average shedding over 900 points, as fears of the Coronavirus becoming a global pandemic grew. (Photo courtesy of Getty Images/Scott Heins) )
courtesy of Getty Images
The
S&P 500 Index
Although the stock market isn’t far from all-time highs, Goldman Sachs strategists are pessimistic that the good times will last. The S&P 500 index will conclude the year around 4300, according to Goldman Sachs strategist David Kostin, only a smidgeon lower than Thursday’s close of 4320.82. Higher interest rates, rising inflation, and tax revisions, in particular, he says, will limit the index’s near-term potential. Furthermore, with S&P 500 price-to-earnings ratios well above 20, Kostin predicts that equities will suffer multiple contraction rather than increase in the next six months.
Low interest rates, according to Kostin, were the macroeconomic driver of equities returns in the first half of 2021. The 10-year U.S. Treasury yield began the year at 0.81 percent and climbed to 1.74 percent before falling below 1.3 percent this week. Nonetheless, Goldman Sachs experts predict that by the end of the year, the 10-year yield will have risen to 1.9 percent, and by the end of 2022, it will have risen to 2.1 percent. While the argument between growth and value stocks rages on, Kostin believes growth stocks will beat value stocks in the second half of 2021 and into 2022. And the transition may already be starting; from the beginning of the year to the middle of May, the
Value of the Russell 1000
The index increased by 15%, compared to only 2% for the S&P 500.
Growth of the Russell 1000
index. In the last six weeks, however, the pattern has flipped, with the Growth index rising 12 percent and the Value index falling 2 percent. These differences, according to Kostin, reflect the 10-year yield inflection in March. While a slowing economy favors growth companies, rising interest rates, in combination with an infrastructure package and tax reforms, may favor value equities in the coming months. As a result, Kostin adds, the near-term forecast for growth versus value is impossible to anticipate. Nonetheless, Kostin advises investors to concentrate on companies with strong pricing power and gross margins in order to mitigate the risk of inflation and rising taxes. In 2018 and 2019, he says, stocks with strong pricing power outperformed as wage growth surged and profit margins shrank. They now have a lower valuation premium than they did before the outbreak. While Goldman Sachs economists believe that the recent episode of inflation is just temporary, Kostin believes that slowing GDP and a tightening labor market–with unemployment anticipated to fall to 3.5 percent by the end of 2022–will boost the value of pricing power. The
S&P 500 Index
On Thursday, the index slid 0.9 percent to 4,320.82. The index is up 15% so far this year. To contact the editors at Barron’s, send an email to editors@barrons.com./n
Read More
