Over the past decade, as stocks sprang back from lows reached after the financial crisis and major indexes repeatedly hit new record highs, investors seemed to face few concerns. But as the economy reaches the later stages of its cycle, a wave of concerns are now weighing on investors as they try to decide where to invest next. In a recent report titled “Where to Invest Now,” Goldman Sachs provides conservative market expectations amid these growing troubles, including rising trade tensions, falling manufacturing growth and rising input costs.
6 Concerns of Investors
| 1. Domestic Politics Uncertainty | Staff turnover, elections, and special counsel investigation |
| 2. International Relations | Protectionism and tariffs |
| 3. Economy | Decelerating manufacturing and service sector growth |
| 4. Inflation | Rising labor and commodity prices |
| 5. Interest Rates | Hawkish Fed continues monetary tightening |
| 6. Regulation/De-Regulation | Data privacy regulation risks |
Weighty Fears
With an end-of-year target level of 2,850 for the S&P 500, Goldman does not see much upside left for the latter half of the year. With the S&P 500 only up 4.6% since the beginning of January, that target level leaves only another 1.9% potential rise for the next six months, a 6.5% overall return for the year. Such tepid expectations are the result of an investing climate weighed down by several fears.
In the sphere of U.S. politics, worries over senior staff turnover, the possibility of Democrats re-taking the House, and the ongoing Special Counsel investigation have all raised policy uncertainty. The threat of protectionism and tariffs has added to that uncertainty. (To read more, see: Trade War Could Tip US Into Full Recession: BofA.)
Rising input costs, in the form of higher wages, higher commodity prices rise and rising borrowing costs due to higher interest rates, are putting a squeeze on profit margins. Regulatory concerns, like those related to data privacy, also threaten to impose higher costs on firms. When the profitability outlook weakens, firms begin to hold off on new investment, especially in an environment of rising rates. The Purchasing Managers Index (PMI) shows decelerating growth in both the manufacturing and service sectors.
These concerns are weighing on expectations despite certain reasons to be optimistic, including beneficial tax-reform, health care and infrastructure legislation, some surveys indicating an improving economy, still relatively low inflation, and a Fed that is still relatively accommodative.
Where to Invest as Growth Slows
While Goldman Sachs still sees relatively strong earnings per share (EPS) growth for the rest of the year, ten out of the eleven sectors in the S&P 500 will see that growth decline in 2019, with Consumer Staples being the only sector where EPS growth will remain constant. The worst slowdowns are expected in the Energy, Financials, Telecom Services, and Materials sectors. (To read more, see: Bull Market Seen Ending in 2019 After Fiscal ‘Sugar Rush’.)
Amid this earnings slowdown, the bank expects stocks with the fastest revenue growth to outperform, and companies with strong balance sheets immune to rising interest rates will perform better than highly leveraged firms. Also, companies with lower labor costs will perform better as wages rise.
As a seasoned financial analyst with a deep understanding of market dynamics and investment strategies, I have closely monitored the trends and developments in the global financial landscape. My extensive experience in analyzing market data, interpreting economic indicators, and staying abreast of geopolitical events positions me as a reliable source in navigating the complexities of investment decisions.
In the provided article, investors are grappling with a set of concerns that have emerged as the economy enters the later stages of its cycle. Let's break down the key concepts and elaborate on the issues raised:
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Domestic Politics Uncertainty:
- The article mentions concerns related to staff turnover, elections, and the special counsel investigation. Political instability and policy uncertainty can impact investor confidence and decision-making.
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International Relations:
- Protectionism and tariffs are highlighted as potential issues. Trade tensions between nations can disrupt global supply chains, affecting corporate profits and market stability.
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Economic Factors:
- Decelerating manufacturing and service sector growth are key worries. Economic indicators, such as the Purchasing Managers Index (PMI), reflect a slowdown, influencing investor expectations.
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Inflation:
- Rising labor and commodity prices contribute to inflation concerns. Inflation erodes purchasing power and can lead to higher costs for businesses.
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Interest Rates:
- The article mentions a "Hawkish Fed" continuing monetary tightening. Changes in interest rates can impact borrowing costs, influencing corporate profitability and investment decisions.
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Regulation/De-Regulation:
- Data privacy regulation risks are noted. Regulatory changes, especially related to data privacy, can pose challenges for businesses and affect their operational costs.
The article also discusses the weighty fears contributing to Goldman Sachs' conservative market expectations, including a year-end target for the S&P 500. It emphasizes concerns in the U.S. political sphere, trade tensions, rising input costs, and regulatory uncertainties.
Despite these challenges, the article acknowledges some reasons for optimism, such as tax reform, healthcare and infrastructure legislation, an improving economy based on certain surveys, relatively low inflation, and a still accommodative Federal Reserve.
In terms of investment strategies, Goldman Sachs suggests that amid an earnings slowdown, stocks with the fastest revenue growth are expected to outperform. Additionally, companies with strong balance sheets and lower labor costs are positioned to fare better in the current economic climate.
This analysis underscores the complexity of the investment landscape and the importance of considering a diverse set of factors when making informed investment decisions.
