Goldman recommends companies with 'high growth and high margins,' counseling against those with 'high exposure to wage inflation.'
Goldman Sachs sees further gains for stocks this year, recommending companies with “high growth and high margins” counseling against companies with “high exposure to wage inflation.”
The bank’s strategists, led by David Kostin, have a three-month target of 4,850 for the S&P 500 index, a six-month target of 5,000 and a year-end target of 5,100.
From the recent level of 4,763, that implies a gain of 2% for three months, a 5% gain for six months and a 7% gain for the year.
“From an earnings perspective, decelerating economic growth will limit sales gains for many companies,” the strategists wrote in a commentary. “Consequently, stock return dispersion will be most evident when viewed through the margin channel.”
They see profit margins growing 40 basis points to 12.6% in 2022. “But rising input costs and labor inflation will pressure margins for some firms,” the strategists said. “Stocks with high labor-cost ratios and exposure to wage inflation will likely underperform.”
As for valuation, “the path of interest rates in 2022 will have a significant impact on stock return dispersion as was the case in 2021,” they said.
“The sharp reversals in bond yields during 2021 drove large factor rotations within the equity market. Looking ahead, our risk-premia model implies downward valuation pressure from
rising bond yields will be offset by a falling equity risk premium.”
Further, “The valuation tradeoff between sales growth and margins will remain a leading source of return dispersion in 2022,” Goldman strategists said.
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