The rotation trade is only halfway through, and these 5 sectors will continue to outperform until it’s over, Goldman Sachs says

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The Wall Street bull in the financial district January 22, 2007 in New York City.

  • Goldman Sachs’s Lou Miller said he believes the rotation trade is only “halfway through” in a new Daily Check-In podcast.
  • Miller highlighted the energy, materials, financials, industrials, and consumer discretionary sectors as top performers.
  • He also talked about the effects of inflation and said investors might look to Europe and emerging markets for their “reopening trade” moving forward.
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The rotation trade is only halfway through, and the industrial, financial, energy, consumer discretionary, and materials sectors will continue to outperform until it’s over, according to Goldman Sachs.

In a new Goldman Sachs’ “Daily Check-In”, Lou Miller, the vice president of equity structuring and sales strategies, said that he believes the rotation trade is set to continue.

“I think we’re definitely halfway through this trade, but I don’t think we’re close to the end. I think there’s still room for this rotation to continue,” Miller said.

The rotation trade is an ongoing move by investors away from highly-valued growth and tech-related stocks to more value-oriented names.

The reasoning behind the trade involves rising growth and inflation expectations – thanks to vaccines and stimulus – which may lead the Fed to increase interest rates and pull back on asset purchases.

That puts pressure on growth stocks which are valued based on discounted future earnings. When the discount rate changes due to increased interest rate expectations, tech and growth stock valuations are called into question.

A new study released by E*Trade on May 3 illustrates the prevalence of the ongoing rotation away from high-flying tech and growth stocks, even by retail investors.

The top three sectors retail investors entered in April were energy, industrials, and communication services.

Miller highlighted a similar basket of sectors for investors to consider in his recent Daily Check-In podcast

Miller said that the industrial, financial, energy, consumer discretionary, and materials sectors are all set for a strong performance while the rotation trade remains in play.

The VP highlighted the fact that the energy, materials, and industrials sectors make up just 14% of the S&P 500 while tech shares account for double that figure. That also doesn’t take into account that Amazon, Tesla, Facebook, and Google aren’t classified as tech stocks.

Miller said that the low market cap illustrates there is room to run in these sectors even after multiple months of the rotation trade.

When asked which sectors investors have been rotating into and should outperform moving forward, Miller said:

“It’s clearly these commodity-sensitive areas of the market like energy and materials, these real economy areas such as industrials, and the reopening sector such as consumer discretionary and then lastly financials. Financials is one of those sectors that is classically considered value.”

Miller also highlighted the growing effects of inflation on a basket of stocks and said his team is looking for “winners and losers there.”

Looking forward, Miller said investors should consider the reopening trade for Europe and emerging markets and be aware of the effects of Biden’s infrastructure spending and tax increases on American equities.

Read the original article on Business Insider

Value stocks will continue to rally into 2021-but overall S&P 500 returns will be tepid, says BofA

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Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 13, 2020 at Wall Street in New York City.

  • A recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian. 
  • But a prospective value stock rally is not necessarily bullish for the broader S&P 500, said the analysts, as the benchmark index is already at extreme levels of valuation and value stocks won’t be able to lift the entire index higher. 
  • “Our value call underpins our tepid outlook for the S&P 500,” said BofA. “But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”
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The recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian.

In a Wednesday note to clients, the analysts highlighted that the Russell 1000 Value index has outperformed growth in the last three months, but the bargain-stock rally isn’t over.

“Despite the recent rotation, extreme valuations and entrenched positioning suggest we are in the early innings of a Value cycle. The relative discount for Value stocks remains nearly two standard deviations below average…” said BofA.

The financials sector is BofA’s top pick for value stocks. They also see opportunities in value-oriented cyclical industries like autos and multiline retail. The tech sector fell to the bottom of BofA’s list. 

But any rally in value stocks is not necessarily bullish for the broader S&P 500, said the analysts. In fact,Savita Subramanian sees the S&P 500 finishing 2021 at 3,800-only a 3% gain from current levels.

Read more:Morgan Stanley is warning that the stock market’s economic recovery trade may soon be over. Here are 4 strategies they recommend for finding the returns that still exist.

The analysts explained that the broader market is already richly valued and may not be able to climb much higher.  A value stock rally won’t be able to lift the entire market.

“Our value call underpins our tepid outlook for the S&P 500,” said BofA.” But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”

The bank remains cautious on stocks in the near-term, as valuations are rich and levels of optimism are at highs not seen since the Great Financial Crisis. The S&P 500 had the best November since 1928, soaring 11%, the analysts said.

“A lot of optimism is baked into stocks, along with rich valuations…and we remain cautious in the near-term. The medium-to-long-term bull case for stocks over bonds remains, although equity returns are likely to be sub-average (~5%),” added BofA.

Read the original article on Business Insider