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The New York-based investment bank believes optimism surrounding the approval of a COVID-19 vaccine before Dec. 31 has been countered by the near-term unpredictability of reopening schools, the outcome of coronavirus relief negotiations and the upcoming presidential election.
Additionally, interest rates remain low and the global economy is regaining its footing.
“The near-term uncertainties around the U.S. outlook and the risk of longer-term economic consequences should continue to favor stocks with strong secular growth prospects and ‘quality’ characteristics, such as strong balance sheets and stable earnings growth,” wrote a team of Goldman Sachs strategists led by Arjun Menon.
The firm recommends information technology, industrials and utilities stocks as the U.S. economy rebounds from its sharpest economic contraction of the post-World War II era.
Technology, which appears to be “stretched in absolute terms,” still has valuations that are well below Tech Bubble levels, the strategists said. The industry is supported by strong balance sheets, higher profit margins and earnings resiliency.
Tech will also offer exposure to a cyclical rebound, through semiconductors and hardware, in the event a vaccine is developed.
Meanwhile, industrials are “strongly correlated with the global growth cycle” and accelerating economies in China and Europe will benefit the space, according to the strategists. The sector is relatively well insulated from the U.S. consumer, who remains cautious in the wake of COVID-19.
The sector would benefit from infrastructure spending, a platform that both President Trump and former Vice President Joe Biden have backed.
Utilities currently pay a dividend yield that is 267 basis points above that on 10-year Treasuries. A gap that wide has typically led to “utilities outperformance,” the strategists said, adding the sector was a laggard after the passage of Trump’s Tax Cuts and Jobs Act and might serve as a hedge should Biden win and raise taxes.
The sectors do not come without risks.
Technology is facing the threat of increased regulation as both Democrats and Republicans look into limiting their reach for different reasons. There is also the threat of an increased tax burden should former Vice President Joe Biden win the upcoming election.
Industrials face the risk that transportation demand is slow to return and Boeing struggles to get production of the 737 Max -- interrupted after two fatal crashes led to the model's grounding -- back on track.
The firm also said investors should go underweight on health care, real estate, energy and materials stocks and remain neutral on consumer discretionary and consumer staples.