- Goldman Sachs’ chief stock strategist is bullish on real assets and commodities right now.
- Peter Oppenheimer says investors should focus on a big capital spending cycle and on profit margins.
- Chief Credit Strategist Lofti Karoui says the credit market still looks healthy.
Peter Oppenheimer doesn’t mince words: The Goldman Sachs strategist says his firm is lowering its forecasts for company profits and economic growth “pretty much everywhere.”
At a media event on Monday, the firm’s chief global equity strategist and head of macro research in Europe said Goldman is now projecting earnings growth of 5% for the S&P 500, and it expects the US economy to grow 2.9% for the year. That’s down from the firm’s previous projections of 8% earnings growth and a growth rate of 3.1% for the US economy.
The Russian invasion of Ukraine is just the latest factor that’s making 2022 a tougher year for markets than a lot of experts anticipated. Commodity prices are spiking because of the war as supply chains are thrown off course yet again, and inflation is the highest it’s been in 40 years.
Goldman’s projections aren’t dire — the GDP estimate is roughly in-line with the economy’s long-term trend. But it wasn’t long ago that experts were predicting an above-average year.
Oppenheimer says that the reality is investors will experience a market with a wide trading range this year, and see lower returns for stocks. He said the current economic cycle is going to be different from the last one where growth was scarce and investors were willing to pay top dollar for stocks that beat the overall trend.
He expects a cycle driven by outsized capital spending on decarbonization and by the need for energy independence and greater military spending in Europe. The biggest winners of that cycle will include companies that enjoy strong demand and can provide the capital that other firms will need.
“We think margin sustainability is going to be much more crucial for investors,” he said. “Lots of money is going to need to be spent on upscaling infrastructure to be able to roll out these new energy sources and that will increase the opportunity set for companies that are providers of that capital.”
He’s particularly bullish on both commodities and commodity prices, noting that companies in areas like oil drilling and mining have been reluctant to spend in recent years, and will have to change course now.
“We’ve been structurally bullish about commodities for some time because we’ve seen underinvestment in the commodity industry following the collapse of demand following the financial crisis,” he said. “If we’re entering a phase where interest rates are gradually rising and inflation is moving to a higher level, we would see real assets as having a bigger and more prominent position.”
Oppenheimer says stocks should outperform bonds and cash over time, and his tilt toward commodities includes stock in commodity producers as well as what they’re making. Meanwhile, he says it made sense to raise an allocation to cash even before the war broke out. He is neutral on credit, and he recommends underweighting government bonds.
Credit markets have stayed steady
Also during Monday’s media event, Chief Credit Strategist Lofti Karoui said there were two major takeaways from the credit markets over the last few weeks. One is that investors simply don’t expect a
recession
, and the other is that even though the war in Europe was a shock to markets, investors continued to behave sensibly.
He says that even bonds that are considered pretty risky and well below investment grade, at the CCC level, held up well for most of the initial turmoil. That’s a good sign.
“It’s consistent with a market that thinks high-yield issuers can weather a recession,” he said, adding that the quality of corporate credit issuers is better than it used to be. “This is probably the highest-quality CCC cohort since 2006-2007.”
It helps, he said, that this economic cycle is still in its early stages and there hasn’t been time for inefficiencies to build up in the credit market. But Karoui said there is one noteworthy change between this cycle and the last one: The credit market was an effective leading indicator as the economy recovered in 2020-2021, but now, its performance is more closely tracking the stock market.
That means investors shouldn’t wait for the credit market to give them a cue to get more bullish.
“I certainly do not expect credit to be in the driver’s seat, a leading indicator like it was in March 2020,” he said.
Meanwhile, he says the contrast between the Federal Reserve’s policies and those of the European Central Bank has made him more bullish on the US market. This month the ECB surprised many investors by saying it planned to shut off its emergency asset purchases in the next few months.
“There’s a policy gap,” he said, adding that he’ll be less optimistic about Europe unless the ECB changes to a more dovish approach.
