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

Strengthening credit quality and Biden’s massive infrastructure plan is setting industrial stocks up for further big gains

iBuilt's modular construction factory.
iBuilt’s modular construction factory.

  • The outlook for credit for industrial companies reached its best level in 15 months in March.
  • Industrial stocks have been gaining on economic growth prospects and an infrastructure bill in the pipeline.
  • The S&P Industrials sector has gained about 8% this year.
  • See more stories on Insider’s business page.

The strongest credit outlook for US industrial companies in more than a year and work in Washington on an infrastructure bill should support further stock gains for the sector.

A forward-looking index of credit opinions for industrial companies in March rose to its highest level in 15 months, with improved conditions arriving as shares of industrial firms, as a whole, have outpaced other sectors this year.

The Credit Consensus Indicators index came in at 50.6 in March, the best level since December 2019, said Credit Benchmark, which monitors internal credit risk views from more than 40 global financial institutions. The index in February was at 48.7 and readings below 50 indicate deterioration in credit quality.

The brighter credit outlook was supported by expansion in the US economy since it slumped into recession in 2020 as the COVID-19 crisis ramped up. The Commerce Department on Thursday upwardly revised its estimate of fourth-quarter 2020 growth to 4.3% from 4.1%.

For March credit readings, the “real standout this month is the US,” said Credit Benchmark in a note Thursday. “There may be also be growing optimism for the UK and EU, whose CCI scores inched closer to 50, although the EU’s economy isn’t as strong as the US’ and it has had struggles with vaccinations.”

Economists have said the vaccination of millions of Americans from the coronavirus crisis and fiscal stimulus packages passed in Washington – including the massive $1.9 trillion bill greenlighted in March – are key factors driving the recovery. But supply chain issues could also temper expectations in the industrial space, said Credit Benchmark.

Cyclical stocks have risen this year as investors position themselves with beneficiaries of economic growth. The S&P 500 Industrial Sector has gained about 8% so far this year, but lags behind the 13% rise for the financials sector.

President Joe Biden is expected next week to introduce his plans to bolster infrastructure spending in the country. The proposal could be worth up to $3 trillion and include focuses on roads and bridges.

Among exchange-traded funds in the industrial space, the Industrial Select Sector SPDR Fund and the Fidelity MSCI Industrials Index ETF have each gained about 9% during 2021.

Read the original article on Business Insider