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Investors are looking to quality stocks amid the prospect of delayed Fed rate cuts.
This time last year, the strength of 'quality stocks' could be attributed to investor concerns about a hard landing, but the growth backdrop has improved substantially during the past 12 months," Goldman Sachs equity strategist David Kostin wrote in a note.
"S&P 500 (NYSEARCA:SPY) (IVV) (VOO) EPS grew by 6% year/year in 2H 2023, and we forecast growth of 8% this year to $241," Kostin said. "During most previous periods of strong S&P 500 profit growth, 'quality' stocks such as those with high returns on capital have typically underperformed and traded with much less of a valuation premium relative to their lower-quality peers."
"Today, rather than growth, concerns over the cost of capital are supporting quality. If the Fed proceeds with cuts later this year and those concerns recede, quality stocks will likely give back some of their recent outperformance," he said. "Should the outlook for earnings growth deteriorate, the recent stretch of quality outperformance will likely continue and also expand to include stocks with stable growth."
Goldman rebalanced its High Quality Stock basket. It comprises large-cap stocks with strong balance sheets, histories of stable sales and earnings growth, above-average ROE and low historical drawdown risk.
The stock by sector are:
Communication Services
- Alphabet (GOOGL), quality score 94
- Charter Communications (CHTR), 84
- T-Mobile (TMUS), 77
- Comcast (CMCSA), 76
- Meta Platforms (META), 74
Healthcare
- Zoetis (ZTS), 91
- IDEXX Laboratories (IDXX), 89
- UnitedHealth Group (UNH), 89
- STERIS (STE), 88
- ResMed (RMD), 87
- Charles River Laboratories (CRL), 82
Consumer Discretionary
- O'Reilly Automotive (ORLY), 98
- Home Depot (HD) 90
- Tractor Supply (TSCO), 88
- LKQ (LKQ), 91
- lululemon athletica (LULU), 79
Industrials
Consumer Staples
Info Tech
- Cadence Design Systems (CDNS), 95
- Accenture (ACN), 95
- Synopsys (SNPS), 90
- Tyler Technologies (TYL), 86
- Monolithic Power Systems (MPWR), 86
- Amphenol (APH), 86
- Broadcom (AVGO), 80
- CDW (CDW), 80
- Fair Isaac (FICO), 80
- EPAM Systems (EPAM), 78
- Arista Networks (ANET), 75
- Microsoft (MSFT), 75
- Cognizant Tech Solutions (CTSH), 74
- KLA (KLAC), 73
- F5 (FFIV), 72
- Intercontinental Exchange (ICE), 87
- MSCI (MSCI), 80
- Arthur J. Gallagher (AJG), 53
- Truist Financial (TFC), 75
- Raymond James Financial (RJF), 74
- Charles Schwab (SCHW), 69
- Northern Trust (NTRS), 68
Materials
- Sherwin-Williams (SHW), 92
Real Estate
- American Tower (AMT), 81
- American Water Works (AWK), 84