Goldman Tips on Stocks Like Pepsi Amid Rate Hikes

Key Takeaway

• Goldman Sachs advises focusing on stable growth stocks like PepsiCo and Waste Management amid high-interest rates and economic slowdown.
• Despite a 3% S&P 500 dip from its peak, hedge funds increase tech investments, with Alphabet Inc. surpassing a $2 trillion valuation.
• Shift in monetary policy expectations from six rate cuts to just one reflects market sensitivity to persistent inflationary pressures.

Market Resilience Amid Interest Rate Concerns

Goldman Sachs has recently shed light on the resilience of the stock market despite the challenges posed by a persistent high-interest rate environment. According to a report led by David Kostin, Goldman's head of U.S. equity strategy, the stock market faces pressure as inflationary concerns prompt the Federal Reserve to maintain higher interest rates for an extended period. This adjustment in monetary policy expectations has led to a shift from anticipating six rate cuts to foreseeing only one in the near future. The S&P 500 experienced a 3% decline from its 52-week high, reflecting the market's sensitivity to these developments. Economic growth has also shown signs of slowing, with real GDP growth decelerating to a 1.6% pace, below the consensus estimate among economists.

Focus on Stable Growth Stocks

In light of the current economic climate, Goldman Sachs recommends that investors concentrate on companies with stable earnings growth. The firm has identified stocks within the Russell 1000 that have demonstrated consistent growth in earnings before taxes, depreciation, and amortization over the past decade. This list includes consumer staples companies such as PepsiCo and Colgate-Palmolive, which are generally considered noncyclical and less affected by economic fluctuations. Additionally, industrial firms like Waste Management and Fastenal, as well as consumer discretionary entities such as Domino’s Pizza and AutoZone, are highlighted for their resilience and stable growth prospects in times of economic weakness.

Hedge Funds Increase Tech Investments

Despite the broader market's challenges, hedge funds have significantly ramped up their investments in the technology sector, marking the largest net buying activity since December 2022. This increased interest, driven by a combination of long positions and short-covering, contrasts with the S&P 500 Information Technology Index's performance, which saw declines throughout April. However, the sector's attractiveness was renewed following strong earnings reports from major players like Alphabet Inc. and Microsoft Corp. These reports contributed to a 5.1% gain in the Information Technology Index last week, ending a four-week losing streak and propelling Alphabet's valuation past the $2 trillion mark.

Street Views

• Goldman Sachs (Bullish on European equities):

  "Shareholder returns are poised to reach an all-time high... This implies a 5% yield. The yield differential with the S&P 500 is the widest ever which makes European equities a reasonable alternative to the US."