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Goldman: These Are Our Two Favorite Sectors in the S&P 500 Right Now
Aspire, Bloomberg Top News | 04 November 2015

Goldman Sachs has two suggestions for clients seeking to invest in a changing economic regime.

Years of interest rates near zero and emerging markets leading the way in terms of economic growth look set to be upended as the Federal Reserve inches towards its first rate hike in almost a decade. The Goldman team, led by chief U.S. equity strategist David Kostin, suggest investors look at information technology and financials as we enter a new leg in global markets.

“We continue to recommend investors overweight Information Technology and Financials. Tech offers strong earnings growth at reasonable valuation, while Financials should outperform as the Fed tightens. Underweight: Energy, Materials, Consumer Staples, and Utilities. Sustained low oil prices will weigh on Energy equities, high valuation will restrain Staples, while rising rates and a flattening yield curve will hurt Utilities. Neutral weight: Health Care, Industrials, Telecom, and Consumer Discretionary.”

Key macro trends that are driving these calls include a steady pace of U.S. economic growth, a U.S. interest rates hike just around the corner, and continued strength in the U.S. dollar. Here’s a broader look at the ratings Goldman has for each sector and how they have performed in 2015:

Stocks that the firm mentions in the overweight sectors include Apple,Google, QUALCOMM, Cisco, and Oracle for Information Technology and American Express, Citi, Bank of America, SunTrust Banks, and DiscoverFinancial for Financials.

Kostin and his team do hedge their bets a bit by saying the stronger dollar is a risk for the tech sector as a larger share of its sales come from overseas. Meanwhile, the prospect of the Fed raising interest rates could take some wind out of financials by hitting real estate investment trusts, or Reits.

Kostin and his team are less optimistic when it comes to consumer staples since they think a stable economy will decrease the popularity of a sector known to be a defensive play. They also expect “lower for longer” oil prices to hurt the energy sector, while higher interest rates will mute the returns of utilities and other high-dividend stocks. Finally, the slowdown in emerging markets as well as lower commodity prices is expected to weigh heavily on materials, Kostin & Co. said.

The firm is now forecasting a mere one percent total return for S&P 500 during the next 12 months and the first Fed rate hike to come in December.

To contact the author of this story: Julie Verhage in New York at jverhage2@bloomberg.net. To contact the editors responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net,Tracy Alloway at talloway@bloomberg.net


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