GOLDMAN SACHS: What to expect from US stocks in the second half of 2015

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US stock investors shouldn’t get too excited about an extended rally in the S&P 500 this year, it’s likely to finish 2015 less than 1% above Monday’s closing level according to Goldman Sachs’ chief US equity strategist David J. Kostin.

He thinks the index, after rallying up to 2,150 before the US Federal Reserve lifts rates – something he believes will occur in September – will finish the year at 2,100.

Here’s a chart from Goldman’s showing the predicted path for index for the remainder of 2015.

While the index is likely to tread water over the medium term, in Kostin’s mind that doesn’t mean that all sectors will perform equally. He provides three recommendations on what stocks to buy and what stocks to avoid.

  • Own US stocks with high domestic sales and avoid firms with high international sales
  • Own stocks returning cash to shareholders via buybacks and dividends
  • Buy stocks with high risk-adjusted prospect returns (Sharpe Ratio) given elevated market valuation

This excellent chart shows the breakdown of S&P 500 onshore and offshore earnings from a sector-specific perspective.

While they have tended to underperform before and after the start of Fed tightening cycles in the past, and in the case of information technology have large proportion of offshore earnings, Kostin believes investors should remain overweight information technology and financials while underweight consumer staples, energy, utilities and materials in the second half of the year.

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