In the current landscape of an increasingly expensive U.S. stock market, Goldman Sachs strategists, led by David Kostin, have identified potential value in small-cap stocks and shares of consumer staples companies. The ongoing rally in the S&P 500, which is approaching record highs, has elevated stock valuations to historical levels. The S&P 500’s price-to-earnings ratio now stands at 20 times, up from 17 times in October, positioning its current valuation in the 85th percentile historically since 1990.
Despite the recent gains in small-cap stocks, the Russell 2000 trades at a multiple of 2 times price-to-book, which is below its 10-year average of 2.2 times. The combination of these low valuations and a positive economic outlook leads the strategists to anticipate a roughly 15% return in the next 12 months for the Russell 2000. This highlights the potential for small-cap stocks to outperform in the coming months, presenting an opportunity for investors seeking value in a market characterized by elevated valuations.
Weak Pricing Power: A Contrarian Play
The strategists at Goldman Sachs favor stocks with weak pricing power, representing companies whose products may experience lower demand when prices rise. These stocks currently trade at a 14% discount compared to those with strong pricing power. Historically, stocks with weak pricing power have outperformed as profit margins improve, a trend poised to benefit from decelerating labor costs within a robust economic growth environment. This contrarian play suggests that amid concerns about inflation and rising costs, companies with weaker pricing power may present attractive investment opportunities.
Consumer Staples: Attractive Valuations in a Defensive Sector
Consumer staples shares are identified as offering attractive valuations. Despite recent underperformance compared to the broader market, consumer staples have lagged behind, while utilities, another traditionally defensive group, have modestly outperformed. Goldman Sachs notes that consumer staples shares have faced concerns related to higher costs and the potential impact of new weight-loss drugs on consumer behavior. However, there are signs of optimism emerging as the pessimism around the earnings outlook for consumer staples appears to be bottoming. This defensive sector may present an opportunity for investors seeking stability and resilience in an environment where market valuations are at historical highs.
Strategic Moves in a Pricy Market
In conclusion, amid elevated valuations in the U.S. stock market, Goldman Sachs suggests exploring value in small-cap stocks, stocks with weak pricing power, and consumer staples shares. These sectors present opportunities for potential returns and resilience in a market that has already priced in certain economic and policy expectations. As investors navigate the complexities of an expensive market, strategic moves into these identified areas may offer a balance of growth potential and defensive positioning.
