US firms that do most of their business at home will fare better than those exposed to Europe, where a recession is all but guaranteed, according to Goldman Sachs Group Inc. strategists.
A Goldman team led by David Kostin say that while the path of US growth may be “uncertain,” the economic situation in Europe is dire.
“Despite concerns that investors have about the US equity market, we believe it offers greater absolute and risk-adjusted return potential than recession-plagued European markets,” they wrote in a note.
Goldman’s preference for US exposure comes during what is turning out to be a particularly tough year for business in Europe amid a gas crisis, soaring inflation and tightening central-bank policy. In dollar terms, the Stoxx Europe 600 has lagged the S&P 500 this year and a Goldman basket of US firms with 100% domestic sales has outperformed one tracking those with high sales to Europe.
The strategy is one of four that Kostin’s team has identified to drive equity performance through the end of the year, the others being stocks with high quality fundamentals, so-called value shares, and big dividend payers.
“Investors concerned about economic contraction should own dividends — either via futures or through individual stocks,” the strategists wrote. “Dividends offer investors exposure to S&P 500 fundamental growth while minimizing exposure to equity valuation risk.”
Kostin and his team are keen on quality stocks that score highly on metrics including strong balance sheets as well as stable sales and earnings growth. They expect the S&P 500 to end 2022 at 4,300 points, or 5.7% higher than Friday’s close, assuming Federal Reserve tightening leads to a continued deceleration in US economic growth.
Mirroring Goldman’s preference for cheaper stocks, Barclays Plc strategists including Matthew Joyce turned overweight on value stocks in Europe on Monday, saying that higher-for-longer rates aren’t yet reflected in value and growth.