Goldman Sachs' 2024 Equity Outlook: Winning Stocks And Sectors To Watch

Goldman Sachs projected a bullish scenario for stocks in 2024, with the S&P 500 expected to hit 4,700, signifying a 12-month price gain of 5% and a total return of 6%, inclusive of dividends.

Analysts David J. Kostin, Ben Snider and Ryan Hammond expect the U.S. economy to continue its modest expansion through 2024, staving off recession risks.

The team forecasted a 5% increase in corporate earnings, with market valuation estimated to remain steady at a price-to-earnings (P/E) ratio of 18x.

While a 6% projected return for the broader market slightly underperformed the typical 8% average return seen in presidential election years, it depends crucially on sustained economic growth and a stable market environment.

Steady Growth Amidst Election Year

According to Goldman Sachs, the persistence of robust economic growth early in the year is expected to lead the market to reassess its current predictions of Federal Reserve rate cuts starting in the second quarter.

Additionally, uncertainties surrounding the U.S. presidential election was likely to dampen risk appetite in the first half.

However, as the year progresses, the anticipation of the initial Federal Reserve rate cut and the resolution of election-related uncertainties are projected to bolster U.S. equity prices.

Magnificent 7 Poised for Continued Dominance

The 2023’s standout story has been the remarkable performance of the “Magnificent 7” tech stocks, including Apple Inc. AAPL, Microsoft Corp. MSFT, Alphabet Inc. GOOG GOOGL, Amazon.com, Inc. AMZN, Meta Platforms Inc. META, NVIDIA Corp. NVDA and Tesla, Inc. TSLA.

These companies now make up 29% of the S&P 500 market cap, with a collective return of 71% YTD, outstripping the rest of the market significantly, as Goldman Sachs wrote in its outlook.

The investment bank anticipates the stocks continued outperformance in 2024, albeit with a cautious outlook due to high market expectations.

Investment Strategies for 2024

Goldman Sachs outlines three key investment approaches for 2024:

1. Prioritize Quality Stocks: Amid ongoing concerns of a potential recession, Ryan Hammond advised focusing on stocks with strong quality attributes. Stocks in this basket include Alphabet, O’Reilly Automotive Inc. ORLY, Church & Dwight Co., Inc. CHD, Accenture plc ACN.
   
2. Invest in Growth Stocks: The analysts recommended growth stocks with high Return On Invested Capital (ROIC) in a stable economic environment. NVIDIA, Enphase Energy Inc. ENPH, ServiceNow Inc. NOW, Eli Lilly and Company LLY and Albemarle Corporation ALB are among the top picks.
   
3. Opportunities in Undervalued Cyclicals: There’s potential in cyclicals currently priced for a recession risk that exceeded Goldman Sachs’ baseline forecast. According to GS analysts, economic surprises to the upside could make companies such as Toro Co TTC, Alaska Air Group, Inc. ALK, Delta Air Lines, Inc. DAL, Crocs, Inc. CROX and John Bean Technologies Corp. JBT particularly attractive.

Goldman Sachs also underscored the importance of diversifying investments across three pivotal sectors, each aligned with specific investment themes.

These sectors are:

• Information Technology: Chosen for its consistent fundamental growth and strong historical returns.
• Health Care: Recommended due to its historical trend of outperforming other sectors in times of low unemployment rates.
• Energy: Selected for its current relative price-to-earnings (P/E) valuation, which is notably low compared to its historical performance dating back to 1990. This positioning in the fifth percentile offers a potentially attractive entry point for investors.

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