Goldman Sachs stock strategist says investors are not as optimistic as market indicates

Published Tue, Jul 7 202011:36 AM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

(This story is for CNBC Pro subscribers only.) Goldman Sachs chief U.S. equity strategist David Kostin told CNBC on Tuesday that investors have a tempered view of the U.S. economic recovery from damage inflicted by the coronavirus pandemic . "Actually, the investors aren't that optimistic, because if they were really optimistic about economic activity, they would own weaker balance sheet stocks," Kostin said on "Squawk on the Street." "That's not happening." Equities have mounted a massive rally from their virus-era lows in late March, with the S & P 500 entering Tuesday's session up about 45% since then. And the tech-heavy Nasdaq Composite has since set a series of new all-time highs , including a fresh intraday record Monday. Kostin said investors have largely favored stocks with longer-term growth potential and stronger balance sheets, which reflects their economic outlook as the U.S. seeks to restart commerce during a public health crisis. "Stocks with the strongest balance sheet [are] up 10% year to date, trade almost 35 times next year's earning," he said. "So, big premium being paid for that longer-term growth." In contrast, companies with weaker balance sheets have been trading at lower valuations and generally have "done really poorly," Kostin said. "They're down almost 20% year to date." Kostin said the market's gravitation toward the companies with robust growth potential helps explain why some "near-term, more cyclical" focused stocks have lagged. "I think that's a theme that is likely to persist for the rest of this year," he added. To be sure, Kostin said that the economic data released in the last few weeks has been stronger than expected and provided an overall boost for the market. Now, the focus is about the resilience of the recovery, Kostin said. "The single biggest topic of discussion relates to the profit level in 2021, looking out into next year," Kostin said. Kostin also said his conversations with portfolio managers are increasingly discussing the November election, including not only the presidential race but Senate contests across the U.S. Currently, Kostin said betting markets and public opinion polls show presumptive Democratic nominee Joe Biden is expected to defeat President Donald Trump . Additionally, Democrats are seen as likely to win control of the Senate, he said. "The market is pricing that in today, and today the market trades at a level that is pretty substantial, at 19 times earning," he said. "So I would argue the market has already given its view that it's not as concerned about which party controls the presidency and the Congress."

People are walking by the New York Stock Exchange (NYSE) building during Covid-19 pandemic in New York on May 26, 2020.

Tayfun Coskun | Anadolu Agency | Getty Images

(This story is for CNBC Pro subscribers only.)

Goldman Sachs chief U.S. equity strategist David Kostin told CNBC on Tuesday that investors have a tempered view of the U.S. economic recovery from damage inflicted by the coronavirus pandemic.

"Actually, the investors aren't that optimistic, because if they were really optimistic about economic activity, they would own weaker balance sheet stocks," Kostin said on "Squawk on the Street." "That's not happening."