Goldman Sachs Provides Stock Recommendations Amidst Latest Rate Spike
Goldman Sachs has analyzed the recent rise in interest rates and identified potential shifts in stock performance as a result. With Treasury yields experiencing a significant jump last week, reaching the highest yield since 2007, David Kostin, Chief U.S. Equity Strategist at Goldman Sachs, suggests that higher rates could negatively impact growth stocks, particularly as the excitement surrounding artificial intelligence and the resilient U.S. economy begins to wane.
Long Duration vs. Short Duration Stocks
Kostin highlights the divergent movements of two stock baskets to support his point. Long duration stocks, which rely on projected earnings and cash flow in the distant future, have started to underperform short duration stocks that generate substantial cash flow presently. Kostin explains that the performance of long duration stocks was bolstered by reduced fears of recession and solvency for loss-making companies during the summer. Additionally, recent investor focus on artificial intelligence has contributed to the positive performance of long duration stocks, many of which are perceived as beneficiaries of AI enthusiasm. However, the recent rise in bond yields, driven by factors unrelated to an improving growth outlook, has caused the long duration basket to lag behind by 6 percentage points (-8% vs. -3%) since September 11.
Goldman's Short Duration Basket
Goldman Sachs' short duration basket comprises several old economy stocks that have outperformed the broader market in September. Despite hold ratings from the majority of analysts covering them, HF Sinclair and U.S. Steel have seen gains of 4.5% and 2.9% month-to-date, respectively. U.S. Steel has also attracted attention due to merger and acquisition speculation, which may introduce additional volatility to the stock. Conversely, rental car company Hertz Global has seen a 20% decline in its shares this month, making it an option for investors seeking short duration stocks that have yet to outperform.
Overall, the short duration stocks highlighted by Goldman Sachs exhibit lower valuations and a stronger near-term earnings outlook compared to long-duration stocks. Kostin notes that the median stock in the long duration basket trades at a higher next 12 months enterprise value-to-sales multiple of 5x, compared to 2x for the median stock in the short duration basket. Additionally, 50% of companies in the long duration basket are expected to post negative earnings per share (EPS) in 2023, in contrast to only 6% for short duration stocks.
Goldman Sachs' long-duration basket includes trendy stocks from the past few years that have proven to be volatile investments. This basket features companies such as Rivian, Lucid, and Teladoc.
In conclusion, Goldman Sachs offers valuable insights into the potential impact of the recent rate spike on stock performance. By assessing the contrasting movements of long and short duration stocks, investors can make informed decisions based on valuations and earnings outlook.
Implications of Goldman Sachs' Stock Recommendations for New Businesses
Goldman Sachs' analysis of the recent rise in interest rates and its impact on stock performance could have significant implications for new businesses, particularly those in the early stages of growth.
Impact on Growth Stocks
David Kostin, Chief U.S. Equity Strategist at Goldman Sachs, suggests that higher rates could negatively affect growth stocks, especially as the excitement around artificial intelligence and a resilient U.S. economy begins to cool. For new businesses, this could mean a reevaluation of their investment strategies and a potential shift towards more stable, short duration stocks.
Long Duration vs. Short Duration Stocks
Kostin's examination of the divergent movements of long duration and short duration stocks provides valuable insights for startups. While long duration stocks, which rely on projected earnings and cash flow in the distant future, have started to underperform, short duration stocks that generate substantial cash flow presently are performing better. This could signal a need for new businesses to focus on immediate cash flow generation rather than long-term projections.
Investment Opportunities in Short Duration Stocks
Goldman Sachs' short duration basket, which includes several old economy stocks that have outperformed the broader market in September, offers potential investment opportunities for new businesses. Despite experiencing a 20% decline in shares this month, rental car company Hertz Global could be an option for investors seeking short duration stocks that have yet to outperform.
In essence, Goldman Sachs' stock recommendations amidst the latest rate spike could significantly influence the investment strategies of new businesses. By understanding the contrasting movements of long and short duration stocks, startups can make informed decisions to navigate the current economic climate.