Goldman says the bull market is still in the early stages, gives six trades to play it

Published Thu, Feb 4 202110:58 AM ESTUpdated Thu, Feb 4 202111:47 AM EST

The stock market's swift comeback to record highs opened a new chapter on Wall Street, and the fresh bull market has a long way to go, according to Goldman Sachs. The S & P 500 quickly bounced back from its March bottom as investors looked past the coronavirus turmoil and focused on a brighter future. Unprecedented fiscal and monetary support in Washington also played a critical role in the market's resilience, which will drive stocks higher in the long run, the bank said. "We believe that we are still in the early stages of a new bull market, transitioning from the 'Hope' phase to a longer 'Growth' phase as strong profit growth emerges," said chief global equity strategist Peter Oppenheimer said in a note. "The changing mix of policy support in this cycle also suggests a possible inflection point towards a more reflationary environment than we have seen since the financial crisis," Oppenheimer added. "This regime shift is likely to drive the bull market higher over coming months and also have important implications for market leadership." The Wall Street firm sees six specific pockets of the market that will have larger-than-average upside this year in the economic recovery. Equities over bonds First, Goldman believes yield-hunting investors should favor equities over bonds. The bank said equity investors will be rewarded when near-zero interest rates eventually rise from the bottom as the move signals a confidence in growth and recovery. "Rising bond yields from extremely low levels should be a positive for equities: they would reflect a positive growth signal and would likely go hand in hand with a decline in the equity risk premium," Oppenheimer said. "Rising inflation expectations would also favor owning inflation-protected assets such as equities." The Federal Reserve kept its foot to the floor last month at its latest policy meeting, keeping its benchmark short-term borrowing rate anchored near zero. Value over growth Stronger economic growth and potentially higher inflation expectations should be a beneficial environment for cyclical and value parts of the market, Goldman said. "A meaningful rise in inflation expectations would typically trigger a reasonable degree of rotation in leadership towards more Cyclical and Value orientated companies," Oppenheimer said. The historic low interest rates and a higher inflation outlook have pushed real yields to negative territory, which led to a further increase in valuations for growth stocks, the bank noted. The tech-heavy Nasdaq Composite rallied more than 43% in 2020, outperforming the S & P 500's 16% return, as investors flocked to high-growth technology stocks, some of which saw great demand during the pandemic. Cyclicals over defensives The same dynamic has had an impact on the relative performance between cyclicals and defensives, Goldman said. "If inflation expectations turn higher, expensive growth areas, particularly those with relatively low growth such as Staples, would be vulnerable to a correction," Oppenheimer said, referring to the staples sector. "At the same time, Cyclicals, including Financials, could enjoy a further relative bounce." So far in 2021, the best-performing S & P 500 sector has been energy, which has jumped 10%. Financials have also gained more than 2% this year. Banks over staples Defensive sectors such as consumer staples have outperformed dramatically as bond yields have fallen over the past year, leaving them vulnerable for a pullback, Goldman said. "At the current time, Staples look expensive, both relative to history and to the market, and therefore vulnerable to a reversal in growth sentiment and bond yields," Oppenheimer said. High volatility During last year's downturn, companies with a record of achieving stable and low volatility returns became appealing investments. However, with growth expectations mover higher, the trend will soon be reversed and high-volatility companies will be favored, Goldman said. "Very low levels of bond yields increase the attraction of stable companies," Oppenheimer said. "Clearly, strong growth and higher bond yields and inflation expectations would tend to reverse this, at least in part." Dividends Goldman also found a relationship between dividend growth and inflation over time in the U.S. market. "The relationship between lower growth and inflation expectations and future confidence in dividends is also interesting, and an area where pricing can shift if inflation expectations change," Oppenheimer said. The S & P 500 currently has a 1.49% dividend yield. Goldman set its 2021 S & P 500 target at 4,300, which represents a 12% gain from here. The firm's outlook is more bullish than the average forecast of 4,082 among top Wall Street strategists, according to CNBC's market strategist survey.

Charging Bull Statue is seen at the Financial District as snowfall in New York City, United States on December 16, 2020.

Tayfun Coskun | Anadolu Agency | Getty Images

The stock market's swift comeback to record highs opened a new chapter on Wall Street, and the fresh bull market has a long way to go, according to Goldman Sachs.

The S&P 500 quickly bounced back from its March bottom as investors looked past the coronavirus turmoil and focused on a brighter future. Unprecedented fiscal and monetary support in Washington also played a critical role in the market's resilience, which will drive stocks higher in the long run, the bank said.

"We believe that we are still in the early stages of a new bull market, transitioning from the 'Hope' phase to a longer 'Growth' phase as strong profit growth emerges," said chief global equity strategist Peter Oppenheimer said in a note.

"The changing mix of policy support in this cycle also suggests a possible inflection point towards a more reflationary environment than we have seen since the financial crisis," Oppenheimer added. "This regime shift is likely to drive the bull market higher over coming months and also have important implications for market leadership."

The Wall Street firm sees six specific pockets of the market that will have larger-than-average upside this year in the economic recovery.