Goldman Sachs has an investor playbook for when the U.S. economy hits peak economic growth from the reopening later this quarter, advising clients to rotate from domestic plays into stocks more linked to a trailing global comeback. The Wall Street firm expects U.S. growth to peak sometime this quarter, which means the cyclical and value stock trade has just a little bit more room to run. However, after peak growth in America, Goldman recommends rotating into stocks more leveraged to global growth, so investors can take advantage of gains as the rest of the worth catches up. Goldman economists expect U.S. GDP growth of 10.5% in the second quarter of 2021, the strongest quarterly growth rate since 1978 besides the epic rebound from the pandemic lows last March. After the Q2 boom, Goldman sees GDP growth slowing in the third quarter and in the subsequent quarters. "Although our economists expect US GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade," David Kostin, chief U.S. equity strategist at Goldman Sachs, told clients. During the strong months in the U.S., Goldman said cyclical industries are where to be; however, as growth peaks and decelerates more defensive industries typically outperform. "Above-consensus economic and inflation data releases in coming weeks should extend the outperformance of cyclicals and value stocks, delaying the sector and factor rotations that typically occur as economic growth peaks," said Kostin. While U.S. growth is coming off its high later this year, Goldman then expects global growth to accelerate. Economic growth in Europe, Japan and some emerging markets will not peak until the third quarter of 2021, according to Goldman economists. "We expect global-facing cyclical stocks will outperform domestic-facing cyclicals as US economic growth peaks in coming months while non-US growth continues to accelerate," said Kostin. To help clients play the global rotation, Goldman recommends its global-facing cyclicals basket. These are S & P 500 stocks from cyclical industry groups with the highest foreign revenue exposures. Take a look at some of the names here. Goldman said the largest risk to this trade is that non-US economic growth rebounds more slowly than its economic forecasts expected. "Last week's delay in the rollout of Johnson & Johnson's vaccine underscores the risk around our forecasts for economic recovery," said Kostin. "Although our economists remain optimistic, particularly for DM vaccination timelines, considerable remaining uncertainty may prevent the market from fully embracing the outlook for cyclical global growth acceleration," he added. — with reporting from CNBC's Michael Bloom.
People are seen on Wall St. outside the New York Stock Exchange (NYSE) in New York City, March 19, 2021.
Brendan McDermid | Reuters
Goldman Sachs has an investor playbook for when the U.S. economy hits peak economic growth from the reopening later this quarter, advising clients to rotate from domestic plays into stocks more linked to a trailing global comeback.