By Sam Boughedda
Goldman Sachs analysts recommend investors own high-margin growth stocks and avoid low-margin growth stocks.
The analysts explained in a note to clients on Thursday that the decline in bond yields has supported growth stocks so far in 2023, but with wide variation.
As a result, they made the recommendation “given the current resilient economic growth pricing within equity markets but pessimistic pricing in rates markets.”
“If the economy avoids recession, real yields are likely to rise, and low-margin growth stock valuations are more sensitive to higher yields,” said analysts. “If the economy enters recession, equity market pricing of growth will likely deteriorate, and history suggests investors will reward ‘quality’ attributes, including high-margin stocks.”
They noted the key risk to this trade is the current equity market pricing of a contained economic slowdown but a dovish Fed persisting.