Brendan McDermid/Reuters
- It's time to turn to value stocks like energy and healthcare as interest rates rise, according to Goldman Sachs chief US equity strategist.
- "Rates are moving higher, and therefore we're looking for value. That'll be the strategy and the playbook for this year," David Kostin told Bloomberg TV.
- Last year's market returns were unusually driven by macro factors, but that's starting to reverse this year, he added.
It's time to turn to value stocks from sectors such as energy and healthcare given interest rates are moving higher, according to Goldman Sachs chief US equity strategist David Kostin.
"Rates are moving higher, and therefore we're looking for value. That'll be the strategy and the playbook for this year," Kostin told Bloomberg TV on Wednesday.
"There's a much greater share of earnings that are coming from energy as compared with its market weight. Like 10% of earnings in the market and maybe 5% of market cap, so that has suggested that earnings are likely to be much higher there," he added.
Value stocks, whose health is more closely tied to the economy, tend to be more resilient amid higher interest rates and inflation than riskier sectors such as tech. Big oil majors posted record profits for 2022, benefiting from the energy-market turmoil triggered by Russia's invasion of Ukraine.
Stocks plunged Tuesday after stronger-than-expected economic data sparked expectations that the Federal Reserve could keep raising interest rates for longer than previously expected. The S&P 500 index of US shares had its worst day of the year so far, closing at the lowest level since January 20 – slipping below $4,000 for the first time in a month.
Demand for stocks typically cools as interest rates rise as investors seek safer options to park their cash, such as savings accounts and bonds that offer more attractive returns.
"The environment that we're more likely to be in, it's a more visible rate path we're anticipating and so it's going to be more of a stock picking side of it," Kostin said.
Last year, as much as 70% of the return on stocks was driven by macroeconomic factors, while the remaining 30% was based on factors around the individual companies themselves, according to him. That's starting to reverse now, and going by history, 60% of equity returns are typically driven by the performance of individual companies, he said.
Goldman Sachs is targeting the S&P 500 to end the year at 4,000 - around the level where it is now.
"Equities rallied as rates fell, now rates move back up and equities have pulled back. $4,000 is our target for the end of the year. We're currently right around that level," Kostin said.
Goldman Sachs said Friday that it is expecting the US central bank to raise interest rates three more times this year, after data released last week suggested persistent inflation pressures and continued resilience in the labor market.