MW Goldman channels 'Art of the Deal' as it picks same S&P 500 target as Morgan Stanley
By Steve Goldstein
Goldman Sachs says mid-cap stocks offer same earnings growth at cheaper prices
It's feeling a bit World War III-y in markets this morning as Russia said it updated its nuclear doctrine. One could reasonably ask why bother hedging against nuclear annihilation, and anyway one would think the logic of mutually assured destruction will take hold.
On that cheery note, assuming investors are here at the end of 2025, Goldman Sachs has released its S&P 500 SPX target: 6,500, which is the same destination that the newly bullish Morgan Stanley picked for its outlook.
Strategists led by David Kostin see parallels with President-elect Donald Trump's "Art of the Deal" book. "Some people have a sense of the market, and some people don't," Trump wrote in that 1987 tome. And those with sense, the strategists said, embraced the Magnificent Seven, and Trump's logic: "To me it's very simple: if you are going to be thinking anyway, you might as well think big."
The Goldman team say the Magnificent Seven will still outperform the other 493 - though by 7 percentage points, which would be the slimmest outperformance in seven years. "Although the 'micro' earnings growth story supports continued Magnificent 7 outperformance, more 'macro' factors such as economic growth and trade policy lean in favor of the S&P 493. Valuation of both cohorts of stocks are elevated vs. history but trade close to fair value," they say.
They say investors should allocate the benchmark weight to Magnificent Seven stocks (that grouping is 31% of the S&P 500) while loading up on mid-caps MID, which trade at a lower price-to-earnings multiple of just 16 but are expected to grow earnings by as much as large-cap stocks.
The Goldman team say there's another strategy that can be borrowed from Art of the Deal: deal making, or specifically, merger-and-acquisition activity. They expect S&P 500 companies to spend 20% more in cash on deals in 2025 - and for overall M&A to increase at an even higher rate because companies will be able to use their elevated stock valuations as an alternative to cash. They have a basket of 62 stocks that they identify as possible M&A targets, which includes Kinetik Holdings $(KNTK)$, Groupon $(GRPN)$, Kosmos Energy $(KOS.UK)$, Magnolia Oil & Gas $(MGY)$ and Electronic Arts $(EA)$.
Two other baskets they recommend are companies that are exposed to small and medium-sized businesses - such as Payoneer Global $(PAYO)$, Xometry $(XMTR)$ and Toast $(TOST)$- and AI-enabled revenue beneficiaries such as HubSpot (HUBS), Couchbase $(BASE)$ and Q2 Holdings (QTWO).
There aren't any companies in all three baskets but a few - notably Meta Platforms $(META)$ - are in two.
One other Art of the Deal dictum is to protect the downside and the upside will take care of itself, which Goldman interprets to mean overweighting materials, software and services and utilities. While the economic backdrop favors cyclicals, the market has already priced in much of that. Software is least reliant on the macroeconomic backdrop, materials offers a low starting valuation and utilities offer defensive exposure if economic growth decelerates and bond yields fall, they say.
The market
U.S. stock futures (ES00) (NQ00) slumped while the yield on the 10-year Treasury BX:TMUBMUSD10Y fell. Gold futures (GC00) rose.
Key asset performance Last 5d 1m YTD 1y S&P 500 5893.62 -1.51% 0.72% 23.56% 29.87% Nasdaq Composite 18,791.81 -2.54% 1.18% 25.18% 32.34% 10-year Treasury 4.369 -7.10 15.50 48.81 -2.46 Gold 2638.7 0.48% -3.50% 27.36% 33.25% Oil 68.58 0.63% -1.72% -3.86% -11.61% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Russian President Vladimir Putin on Tuesday signed a revised nuclear doctrine declaring that a conventional attack on Russia by any nation that is supported by a nuclear power will be considered a joint attack on his country.
Walmart $(WMT)$, Lowe's $(LOW)$ and Medtronic $(MDT)$ are among the companies set to report results.
The Justice Department is going to ask a judge to force Alphabet $(GOOGL)$ to sell off its Chrome browser, according to Bloomberg News.
Bakkt Holdings $(BKKT)$ extended gains, up 19%, after a 162% surge on Monday on a Financial Times report that Donald Trump's social media group was in talks to buy the crypto trading venture.
Super Micro Computer $(SMCI)$ named a new auditor, BDO, to bring its Nasdaq listing into compliance.
Housing starts data is the highlight on the economics calendar, which also includes state payrolls data, which takes on added significance after hurricanes impacted the national payrolls report.
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The chart
There is cheap and then there is cheap . Even adjusted for the fact that the U.K. stock market is tilted toward more defensive plays, its price-to-earnings ratio relative to the rest of the world still looks cheap, say UBS strategists. They are overweight U.K. stocks, as they see the country's equities will benefit from a stronger dollar, fiscal easing, low exposure to China, very high excess savings, strong real wage growth and monetary policy easing - all with less Trump risk than any major non-U.S. market.
Top tickers
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-Steve Goldstein
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(END) Dow Jones Newswires
November 19, 2024 06:46 ET (11:46 GMT)
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