Market Bullish As Goldman Releases Playbook Fort He End Of Fed Rate Hikes

It's time for investors to get on board with equities and take advantage of the decline in interest rates, according to Goldman Sachs, as the Federal Reserve's hiking cycle winds down.

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The collapse of Silicon Valley Bank last month has led many investors to predict that central bank policymakers will pivot their approach to inflation fight following their 25 basis point increase in rates just a month earlier. The futures market predicts that policymakers will take a back seat after raising rates by 25 basis points once again in May.

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Goldman Sachs' David J. Kostin said in a Friday client note that historically speaking, stocks have rallied for months after the end of prior rate hike cycles, which may lead to gains in markets, particularly in future months as well.

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In the three months following the end of a rate hike, the S&P 500 has on average increased by 8% on average, and it has been up five out of six times in that period, according to the note. In the meantime, the broader index has gained 19% on a 12-month basis, rising five out of six times, and adding more than 10% on each occasion.

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During the past Fed tightening cycle, US equity markets have generally rallied in the months that followed the end of the cycle," Kostin wrote in a recent article.

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There is no doubt that Kostin believes any rally in the S&P 500 will be limited, based on his firm's year-end forecast of 4,000 for the index.

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“The S&P 500’s baseline year-end forecast stands at 4,000, which represents no upward movement from today, breaking with historical patterns at the end of hiking cycles when the market does not perform well. Kostin wrote that the economists’ baseline forecast assumes that the Fed will hike one more time in June and then the economy will experience a soft landing after that.”

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We believe that despite historical precedent suggesting an upside risk to our forecast for a flat equity market, there will be specific headwinds in 2023 for both S&P 500 valuations and earnings, which will make nearterm returns less strong than they were at the end of previous tightening cycles," Kostin explained in his letter.

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The firm's economists predict that there is a 35% likelihood of a recession in the next 12 months, which is lower than the 60% consensus expectation of an impending recession. So, he reiterates that he doesn't expect one in his base case.

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As a result, Goldman Sachs has offered some recommendations on high-margin growth stocks that might benefit from this backdrop.

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In addition, consumer discretionary stocks such as Las Vegas Sands were included on the list. Since early this year, Las Vegas Sands has seen a 22% increase in profits. It also has a net margin of 21% and a 24% increase in sales. Morgan Stanley also announced last month that it would remain focused on growth and recovery names among gaming stocks, such as Las Vegas Sands.

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As per Goldman Sachs, Solar stock Enphase Energy has a very high sales growth rate and a high margin, which means that there is a good chance that shares are on the rise. Although Enphase's stock is down 21% this year, Raymond James said that this means the majority may return.

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In late September and early October, Paylocity shares were added to the Goldman list, despite the company's decline in 2022. Shares are up slightly in 2023. The stock has been upgraded by DA Davidson to buy from neutral, saying Paylocity has little downside risk and a more attractive valuation than it had previously had.

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The stock of Datadog, which has a very high sales growth rate and a high net margin, was part of the group. Although the software stock has suffered over 2% this year, it still performs very well.

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Airbnb and Eli Lilly are also on this list of stocks to watch.