Goldman Sachs sees risk of major stocks draw down as modest, for now

• Strategists at Goldman Sachs see no real reason why there would be a major retreat in US stock in coming months.
• The S&P 500 rose to an all-time-high on Friday, after a swift rebound from a slump triggered by the Omicron variant.
• The strategists advise investors own stocks with high growth and high margins. 

Goldman Sachs strategists see little reason to expect a major retreat in US stocks in the months ahead, even as the breadth of the rally that has pushed the S&P 500 index into successive records is getting increasingly narrow. 

Just five stocks account for 51% of the US benchmark’s returns since April, Goldman’s strategists led by David Kostin wrote in a note to clients. Those same stocks - Apple, Microsoft, Alphabet, NVIDIA, and Tesla - together account for more than a third of the gauge’s returns this year and more than a fifth of its total market capitalisation, according to the strategists. 

The S&P 500 rose to another all-time-high on Friday, after a swift rebound from a post-Thanksgiving slump triggered by the spread of the Omicron variant. The highest year-over-year US inflation reading since 1982, and an increasingly hawkish tone from the Federal Reserve, have not deterred investors from buying in the dips. 

The difference between the initial post-pandemic rebound and the recent gains is that the breadth of the rally has markedly narrowed, and this has been causing alarm, according to Goldman.

"Following periods of sharply narrowing market breadth – similar to the recent experience – equities have historically exhibited weaker-than-average returns and deeper drawdowns," the strategists wrote. 

• READ | Goldman Sachs is ramping up in SA, putting it on collision course with local big banks

Looking ahead though, there are few reasons to see why history would repeat itself this time. 

"The macro environment does not suggest drawdown risk is elevated in the coming months," the strategists wrote, highlighting that earnings and margins continue to surpass expectations, a low risk of recession, and share prices already reflecting the likely Fed tightening. 

"Nominal and real rates are expected to rise but remain low over the coming months, supporting the backdrop for both valuation and equity demand," the strategists said, advising investors to own stocks with high growth and high margins. 

Get the biggest business stories emailed to you every weekday.