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Goldman has a strategy to play the trade war that divides the stock market, pitting Amazon vs Apple

Key Points
  • Services-providing companies like Amazon will fare better than goods makers like Apple during a trade war, Goldman says.
  • Goods-producing companies like Apple, with $10.22 billion in sales in its greater China category for its fiscal second quarter, Johnson & Johnson and Exxon Mobil are more exposed to tariff retaliation, Goldman says.
  • During this market sell-off, Goldman said services stocks like Amazon, Google and Microsoft have fewer foreign input costs subject to tariffs and perform better. They may be better plays even if the trade dispute is resolved, the firm says.
Packing worker Hashmat Zubair fills a delivery box with products at the Amazon fulfillment center in Baltimore, Maryland, April 30, 2019. R
Clodagh Kilcoyne | Reuters

As markets tumbled under the threat of a trade war with China, Goldman Sachs told clients there would be one distinct group of winners and one group of losers in the stock market as this foreign policy drama unfolds.

Services-providing companies like Amazon will fare better than goods-producing firms like Apple during a trade war, Goldman Sachs said in a note to clients on Tuesday.

"Services firms are less exposed to trade policy and have better corporate fundamentals than goods companies and should outperform even if the trade tensions are ultimately resolved, as our economists expect," wrote David Kostin, Goldman's chief U.S. equity strategist.

Stocks are getting hammered this week as President Donald Trump threatened new tariffs on China after the U.S. said Beijing reneged on key parts of a developing trade agreement. The Dow Jones Industrial Average is down nearly 540 points this week while the S&P 500 and the Nasdaq are down more than 2%. U.S. Trade Representative Robert Lighthizer said the U.S. is raising tariffs on $200 billion worth of Chinese goods from 10% to 25% on Friday.

This turmoil will divide the market into two parts, Goldman's strategy team said. They split the S&P 500 into two baskets: goods-producing companies and services-producing companies, evaluating each one's risk factors during a looming trade war.

During the sell-off, Goldman said services stocks like Amazon, Google and Microsoft have fewer foreign input costs subject to tariffs and should outperform.

"The trading pattern during the past year of tariff announcements and delays suggests services-providing stocks will outperform goods-producing stocks as long as the trade dispute continues," the note said.

Plus, these companies have more stable gross margins and stronger balance sheets, the firm points out, which could lead to their outperformance regardless.

On the other side, goods-producing companies like Apple, with $10.22 billion in sales in its greater China category for its second quarter, along with Johnson & Johnson and Exxon Mobil are more exposed to retaliation by China.

The services basket, containing additional companies like Facebook, Disney, Home Depot, AT&T and McDonald's, are expected to grow 2019 sales by 9% and earnings by 7%, Goldman pointed out.

Other names on the services list that should outperform include Netflix, Comcast and Wells Fargo, the firm said.

"Counter-intuitively, wage inflation above 3% will provide a slight relative boost to services firms, which commit a smaller share of revenues to labor," Kostin said.

Plus, Goldman noted that of the 260 companies in the services basket, 175 or 58% of market value, also fall into Goldman's domestic sector basket, less exposed to China. The goods basket is overwhelmingly international, 193 companies or 85% of market cap fall into Goldman's global sector basket.

Within the goods basket, companies like Procter & Gamble, Intel, Chevron, Coca-Cola and Boeing, are estimated to have negative earnings growth of 2% and no sales growth at all this year, the firm said.

"The faster growth rate supports the valuation premium of services, which trades at a 17.5x forward P/E multiple vs. 16.8x for goods," Kostin said in the note.

PepsiCo, Broadcom, Honeywell and Nvdia are also on the goods list and should be avoided, Goldman said.

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