- David Kostin spoke to the Exchanges at Goldman Sachs podcast about the two big risks of technology’s record market dominance.
- Goldman’s chief equity strategist said that positioning limits in mutual funds and looming antitrust legislation pose risks for those looking to invest in technology.
- However, he recommended investors add growth in their portfolios through technology as part of a strategy he discussed. Large companies with strong balance sheets are leading the S&P 500’s rally, according to Kostin.
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Almost a quarter of the market capitalisation of the S&P 500 is comprised of just five tech companies, and while this poses risks, it hasn’t stopped Goldman Sach’s David Kostin from recommending investors buy big tech.
The chief US equity strategist outlined “two big risks” involved with tech’s record levels of market capitalisation, and how investors should position given these risks on last Wednesday’s episode of the Exchanges at Goldman Sachs podcast.
Kostin said the first risk is that many mutual funds must limit a single stock position to around 5% of the fund’s assets. This is an issue because the market breadth is extremely narrow. Kostin said the five largest stocks collectively are up 41% year-to-date, but the other 495 stocks are down 2% for the same period.
“This narrow breadth market led by a few companies that are now pushing up against a limit as to what many mutual fund managers can hold is an issue,” Kostin said. The second concern is looming antitrust legislation for big tech companies. Kostin said that 20 years ago when the Justice Department filed actions against the dot-com bubble tech giants AT&T, IBM, and Microsoft, the revenue growth of the companies slowed dramatically and valuations compressed. Now given the market concentration, “a quarter of the market is at potential risk” for this, he said. Kostin emphasised he is not forecasting that there will be antitrust legislation, but only stating that it is a risk.
Still, the stock chief is recommending investors buy technology stocks as part of a strategy he discussed.
“The portfolio we recommend as a strategy has growth in it through technology, benefiting from low interest rates,” he said. He also recommended investors add industrials into the portfolio for cyclical benefits, as well as utilities for extra yield.
Goldman Sachs held a forecast of 3,400 for the S&P 500 in January, and now Kostin said the firm has raised the year-end forecast to 3,600. Kostin added he’s forecasting the index will reach 3,800 within 12 months.
But the market’s record highs are driven by large companies with strong balance sheets, while smaller companies are still struggling. Stronger balance sheet stocks this year have outperformed weaker balance sheet companies by about 30 percentage points, Kostin said.
“It’s an interesting observation that if the investor community really believed that the economy was in a healing way, and getting better, and a vaccine was on the horizon and things were getting better, then smaller cap stocks should do better,” he said.
“Weaker balance sheet companies should by rallying, but they’re not. And so that suggests that investors are still cautious in terms of their overall positioning. And I think that makes sense given the uncertainty on whether it’s the election, whether it’s the geopolitical situation, the medical situation. For all these reasons larger-cap stocks are likely to do better,” Kostin said.