Goldman Sachs explains the biggest factors that will drive returns in all 11 stock-market sectors amid virus uncertainty — and lays out how you should position your portfolio in each one (2024)

"The near-term uncertainties around the US outlook and the risk of longer-term economic consequences should continue to favor stocks with strong secular growth prospects and 'quality' characteristics, such as strong balance sheets and stable earnings growth," Arjun Menon, a US equity strategist at Goldman Sachs, said in the note.

"Stocks with solid long-term growth prospects and strong balance sheets have generally been the strongest performers in 2020," he continued.

But the bank also broke down the driving forces behind each of the 11 market sectors, and how investors might shift their strategies in each one.

Strategies for each of the 11 market sectors

First, Goldman says investors ought to overweight three sectors, meaning they should own higher percentages than these occupy in the S&P 500 index.

One is information technology, currently 27% of S&P 500 index, on the basis that it does well in periods of growth uncertainty.

Menon, the note's lead author, also added: "Low interest rates increase the value of the sector's long-term growth prospects that, in cases like e-commerce and cloud usage, have been accelerated by the impact of the pandemic on consumer and business activity. Tech also offers exposure to a cyclical rebound (Semis and Tech Hardware) in the event of a vaccine or medical breakthrough."

Investors seeking exposure to the IT sector might consider the Vanguard Information Technology ETF (VGT).

Another sector is industrials, which currently makes up 8% of the S&P 500, because it is relatively shielded from consumer spending. There is potential for the sector to reap the benefits of an infrastructure bill.

Those looking for exposure to the industrials sector might consider the Fidelity MSCI Industrials ETF (FIDU).

The bank also recommends overweighting utilities, which occupies 3% of the S&P 500.

"We recommend investors overweight Utilities given its high dividend yield and compelling valuation relative to interest rates," Menon said. "2021 EPS estimates have declined by just 1% for Utilities this year, the smallest cut among S&P 500 sectors."

Investors who want exposure to utilities might consider the iShares Dow Jones US Utilities ETF (IDU).

Second, Goldman recommends index-weighting — or allocating a sector in your portfolio with the same percentage that it occupies in the S&P 500 index — four sectors.

One is financials — 10% of the S&P 500 — as they see economic growth on the horizon, although interest rates are bound to stay put near zero.

Another is communication services (11% of the S&P 500), nearly half of which is made up by Alphabet (GOOGL) and Facebook (FB). While Goldman says these firms have strong fundamentals and growth prospects, potential antitrust regulation could hurt the sector.

And consumer staples and consumer discretionary, currently 7% and 11% of the S&P 500 respectively, are also neutral, as near-term consumer spending levels remain uncertain, though Amazon (AMZN), which could also face eventual antitrust legislation, is expected to continue its success in consumer discretionary.

Finally, Goldman says to underweight four sectors, starting with healthcare, which is currently 14% of S&P 500.

"We expect policy uncertainty will remain a headwind to Health Care valuations through the US presidential election," the note said. "While earnings strength has supported the performance of Health Care stocks so far this year, the sector trades at nearly its lowest relative valuation multiples on record."

Another sector with an underweight rating is real estate, currently 3% of the S&P 500 index, given the increasing presence of remote work and distance learning and the related decline in rent growth.

Energy (3% of the S&P 500) is also rated as underweight.

"Low long-term growth prospects, range-bound oil prices, and weak balance sheets in absolute terms and relative to history will likely weigh on energy," the note said. "Potential policies focused on clean energy and pollution limits, such as those proposed by Vice President Biden, would also hurt energy companies."

Lastly, the bank recommends underweighting materials, which occupies 3% of the S&P 500. The sector has lackluster earnings-per-share estimates through 2021, and investors may also be pricing a rally in, according to the note.