Goldman Sachs: Defensive allocation "both offensive and defensive," seven sectors and recommended targets to help cope with fluctuations in the U.S. stock market

According to the Zhitong Finance APP, recently, Goldman Sachs released an in-depth research report on energy, public utilities, and mining, providing a comprehensive analysis of market trends, investor sentiment, and the performance of various sub-sectors, along with corresponding investment recommendations.

Market Sentiment and Macroeconomic Background

Currently, the global market is shrouded in a risk-averse atmosphere, with investors wary of the uncertainty surrounding the economic outlook. The overall tone of the market has shifted to cautious, with a noticeable cooling of risk appetite. In such an environment, the defensive demand for asset allocation among investors has significantly increased, with a greater inclination to seek investment targets that offer stable returns and risk resistance to cope with potential market fluctuations.

Firstly, the crude oil market is facing the impact of a short-term economic slowdown, with weakened growth momentum on the demand side. At the same time, the return of OPEC+ supply has further exacerbated concerns about the balance of supply and demand in the market. Brent crude oil prices are currently at the lower end of Goldman Sachs' forecast range of $70 to $85 per barrel. This price trend reflects the market's complex emotions regarding the crude oil market, with concerns about oversupply and uncertainty about demand prospects.

Secondly, the development of clean technology is encountering resistance from rising financing costs, suppressing the overall development sentiment in the industry. Among various sub-sectors, the residential solar panel sector has been particularly impacted. The increase in financing costs has put pressure on the investment return rates of projects, leading to a decline in installation willingness among consumers and businesses, and slowing the pace of market expansion.

Lastly, market expectations regarding electricity demand have shown a divergence. On one hand, the construction progress of AI data centers has not met the market's earlier optimistic expectations, and the anticipated demand growth has not materialized as expected. On the other hand, there is uncertainty regarding the regulatory policies of the FERC (Federal Energy Regulatory Commission), making investors more cautious in their investment decisions in the electricity market, which has affected overall market confidence to some extent.

Sector Analysis and Recommended Targets

1. Midstream Energy: Shifting from Defensive to High Beta, Focus on Asset Quality

The midstream energy sector, once known for its stability and defensiveness, is now undergoing a significant transformation. Traditionally, this sector was viewed as a safe haven due to its low correlation with tech stocks, but with the rising expectations of AI power demand, this correlation has changed. The development of AI technology has driven the construction of infrastructure such as data centers, thereby increasing the demand for energy, which has enhanced the linkage between the midstream energy sector and tech stocks. At the same time, the diversification of the investor structure has also led to an increase in the overall beta value of this sector, indicating heightened market sensitivity and increased volatility.

Nevertheless, Goldman Sachs believes that the fundamentals of natural gas demand remain solid. Although LNG projects face some short-term fluctuations, such as a potential contraction in Haynesville production from 2027 to 2029, these factors have already been fully reflected in current stock prices. Concerns about the midstream energy sector have been somewhat exaggerated, and the asset quality of this sector remains a key focus for investors In the midstream energy sector, Kinder Morgan (KMI.US) is a focus recommended by Goldman Sachs. Kinder Morgan has strong defensive support, and its long-distance natural gas pipelines and refined oil network form a solid asset base, ensuring the company's stability amid market fluctuations. This asset portfolio not only provides stable cash flow but also reduces operational risks, making Kinder Morgan uniquely attractive in the current market environment.

Goldman Sachs has set a target price of $31 for Kinder Morgan, based on a 12 times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) estimate for 2026. Kinder Morgan's current market price is $26.14, indicating some room for appreciation. For investors, Kinder Morgan not only has defensive qualities but also growth potential, making it a key investment target in the midstream energy sector.

2. Integrated Energy Giants and Refiners: Balance Sheet is King

In a market environment characterized by fluctuations in crude oil prices, the advantages of integrated energy giants and refiners are becoming increasingly apparent. Companies in this sector typically have strong balance sheets, which enable them to better withstand market turbulence. Robust cash flow and high dividends have become key indicators for investors when selecting investment targets. These companies can maintain stable earnings through effective financial management under complex market conditions, providing reliable returns for investors.

Chevron (CVX.US) is a recommended target by Goldman Sachs in the integrated energy giants and refiners sector. Chevron's financial health is impressive, with a net debt-to-capital ratio of only 10%, indicating excellent debt management and strong financial stability. Additionally, Chevron's dividend yield is as high as 4.4%, making such a dividend level very attractive to investors seeking stable income in the current low-interest-rate environment.

In terms of project progress, Chevron's execution capabilities in Kazakhstan and the Gulf of Mexico have been validated by management. The smooth advancement of these large projects not only helps enhance the company's profitability but also strengthens its competitiveness and influence in the global energy market.

Goldman Sachs has set a target price of $183 for Chevron, based on an 8 times EV/DACF (Enterprise Value/Discounted Cash Flow) estimate. Chevron's current market price is $152.95, indicating some room for appreciation. For investors, Chevron not only has defensive qualities but also growth potential, making it a key investment target in the integrated energy giants and refiners sector.

In addition to Chevron, Goldman Sachs also pointed out that if oil prices rebound, mid-beta targets such as Canadian Natural Resources (CNQ.US) and ConocoPhillips (COP.US) may have room for elasticity. It is reported that Canadian Natural Resources announced strong performance this week, while ConocoPhillips, after recently dropping below $90, has a valuation that implies significant upside relative to Goldman Sachs' 12-month price target These companies may exhibit more active stock performance during rising oil prices, providing investors with higher potential returns. Investors can appropriately allocate these resilient targets based on their risk preferences and investment goals, anticipating a rebound in oil prices to achieve asset appreciation.

3. Exploration and Production (E&Ps): Dual Basin Layout to Hedge Volatility

In the market environment of dual fluctuations in crude oil and natural gas prices, companies in the E&Ps sector face significant challenges. Price instability makes it difficult to predict company revenues and profits, increasing operational risks. However, some companies have successfully built defensive systems through strict cash flow management and effective hedging strategies.

These companies focus on maintaining robust cash flow by optimizing operations and controlling costs, ensuring they have sufficient funds to sustain normal operations during price fluctuations. At the same time, the application of hedging strategies helps them lock in profits over a certain period, reducing the impact of short-term price volatility. This defense mechanism, centered on cash flow discipline and hedging strategies, allows these companies to maintain relative stability amid market turbulence, providing investors with a reliable source of returns.

Expand Energy (EXE.US) is a recommended target in the E&Ps sector by Goldman Sachs. Expand Energy's dual basin asset layout is a significant advantage, effectively diversifying the market risk of a single basin through asset allocation in different basins. This geographical diversification reduces the impact of local price fluctuations or supply disruptions on the company's overall performance, enhancing its risk resilience.

Moreover, Expand Energy's "hedging wedge" strategy further smooths out short-term price fluctuations. This strategy cleverly balances the risks and returns brought by price volatility through financial derivatives and other tools. When prices rise, the company can achieve certain profits; when prices fall, the hedging tools can provide protection and reduce losses.

Goldman Sachs has set a target price of $121 for Expand Energy, based on an 8x estimate of free cash flow for 2026. Currently, Expand Energy's market price is $96.03, indicating some room for growth. For investors, Expand Energy not only possesses defensive qualities but also has growth potential, making it a key investment target in the E&Ps sector.

4. Clean Tech: Focus on Utility-Scale Solar

After the earnings update for the fourth quarter of 2024, the clean tech sector as a whole faces certain pressures, with weak demand in the residential solar market and rising financing costs also suppressing industry development. However, in such a market environment, the utility-scale solar market shows clear structural opportunities. Utility-scale solar projects are typically larger in scale, allowing for better cost control and efficiency improvements, while benefiting from policy support and the broader trend of energy transition, thus having stable demand and growth potential Nextracker (NXT.US) is a recommended stock in the clean technology sector by Goldman Sachs. Nextracker's booking volume for 2025 is at an industry-leading level, demonstrating strong market competitiveness and order momentum. Its business model and market positioning allow it to effectively diversify risks, with no significant single downside risk. The company has secured stable revenue sources and project reserves by establishing long-term partnerships with multiple utility companies.

Goldman Sachs has set a target price of $61 for Nextracker, based on a forward price-to-earnings (P/E) ratio of 15 times. Nextracker's current market price is $42.09, indicating significant upside potential. For investors, Nextracker not only possesses defensive qualities in the current market environment but also has substantial growth potential, making it a key investment target in the clean technology sector.

5. Utilities: Grid Investment Drives Defensive Growth

Although the demand for AI data centers has materialized slower than expected, the long-term growth logic of the utilities sector remains solid. Grid upgrades and regulatory transparency have become key factors supporting the development of this sector. Utility companies can meet the growing electricity demand through continuous grid investment, while also enhancing the stability and efficiency of the grid, laying a solid foundation for future development. Additionally, the transparency and stability of regulatory policies provide companies with a predictable operating environment, helping to reduce investment risks.

Southern Company (SO.US) is a recommended stock in the utilities sector by Goldman Sachs. Southern Company's growth points are mainly concentrated on transmission investments in Georgia and pending power generation project bids. As an important economic region in the southeastern United States, Georgia's electricity demand continues to grow. Southern Company's transmission investments in this area not only meet the local economic development's electricity needs but also bring stable revenue to the company. Furthermore, pending power generation project bids are expected to provide Southern Company with opportunities for profit upgrades by 2027, further enhancing the company's profitability.

Goldman Sachs has set a target price of $100 for Southern Company, based on a price-to-earnings (P/E) ratio of 21 times. Southern Company's current market price is $88.74, indicating some upside potential. For investors, Southern Company not only possesses defensive qualities but also has growth potential, making it a key investment target in the utilities sector.

6. Energy Services: Order Visibility Locks in Earnings

The energy services industry currently faces challenges from policy uncertainties, leading to some market concerns about the short-term outlook for this sector. However, the backlog of orders and improving profit margins for some companies in the industry provide investors with a defensive buffer. These companies maintain relatively stable earnings amid market fluctuations through effective order management and cost control Decommissioning FMC (FTI.US) is a recommended stock by Goldman Sachs in the energy services sector. The core logic behind Decommissioning FMC lies in its ability to drive gross margin expansion through Subsea 2.0 orders. With the continuous advancement of subsea energy development technology, Decommissioning FMC has seen a sustained increase in order volume in this field, bringing considerable revenue and profit margins. At the same time, the company is committed to improving its EBITDA conversion rate, aiming to reach 50%, demonstrating its ongoing enhancement in operational efficiency and profitability.

Goldman Sachs has set a target price of $36 for Decommissioning FMC, based on an EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization) valuation of 6.5 times. The current market price of Decommissioning FMC is $26.31, indicating significant upside potential. For investors, Decommissioning FMC not only possesses defensive characteristics but also has substantial growth potential, making it a key investment target in the energy services sector.

7. Metals & Mining: Leading Advantage Amid Trade Policy Disruptions

The metals and mining sector is currently facing uncertainties due to trade policies such as U.S. tariffs, leading to some concerns about the short-term outlook for the sector. However, leading companies in the industry are demonstrating strong competitive advantages through resource integration and enhanced cost control capabilities. These companies can maintain stable earnings in a complex market environment through economies of scale and cost advantages, providing reliable returns for investors.

Nucor Corporation (NUE.US) is a recommended stock by Goldman Sachs in the metals and mining sector. Nucor's competitive moat lies in its full-cycle production and market capabilities, as well as its resilience in understanding market demand. The company possesses strong technical strength and cost control capabilities in all aspects of steel production, allowing it to remain competitive across different market cycles. Additionally, Nucor has keen insights into changes in market demand, enabling it to adjust production and sales strategies promptly to adapt to market fluctuations.

Goldman Sachs has set a target price of $177 for Nucor Corporation, based on an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) valuation of 8.8 times. The current market price of Nucor is $131.99, indicating significant upside potential. For investors, Nucor not only possesses defensive characteristics but also has substantial growth potential, making it a key investment target in the metals and mining sector.

Key Data Verification and Analysis of the Energy Market

In the current complex and volatile energy market environment, accurately grasping key data on crude oil, natural gas, and the utilities sector is crucial for investors to make informed decisions. Below is a detailed verification and in-depth analysis of these key data points.

1. Crude Oil Expectations: E&P Stock Valuations Imply WTI Oil Price of $90 per Barrel, Slightly Above Five-Year Futures

The implied WTI (West Texas Intermediate) oil price in the valuations of exploration and production (E&P) stocks is $90 per barrel, which is slightly above the five-year futures price. This phenomenon indicates that the market expects E&P The expectations for the P sector are relatively optimistic, and investors are willing to pay a higher premium for the future earnings of these companies.

E&P companies can typically achieve higher profits under expectations of high oil prices, as their earnings are directly linked to crude oil prices. The five-year futures prices reflect the market's average expectations for crude oil prices over a longer time span, while the implied oil prices in E&P stock valuations are above this level, indicating that the market is more optimistic about the short-term trends in crude oil prices or believes that these companies can achieve above-market-average returns in future market conditions.

Figure 1

2. Natural Gas Prices: The implied long-term gas price for gas E&P stocks is $3.80 per million British thermal units, close to Goldman Sachs' mid-term expectation of $3.75

The long-term natural gas price implied by the valuations of gas E&P stocks is $3.80 per million British thermal units, which is very close to Goldman Sachs' mid-term expectation of $3.75. This indicates that the market's expectations for the long-term trend of natural gas prices are relatively stable and align with the analysis views of professional institutions.

It is reported that the value of gas E&P companies largely depends on the trend of natural gas prices, as their revenue primarily comes from the production and sale of natural gas. Goldman Sachs' mid-term expectation provides a reference point for investors, and the market's actual expectations are close to it, indicating a certain consensus on the long-term trend of natural gas prices. This consensus helps investors have a relatively clear price expectation basis when evaluating gas E&P stocks, allowing for a more accurate judgment of whether the stock valuations are reasonable.

Figure 2

3. Utility Valuation: When the 10-year U.S. Treasury yield is below 3%, the industry P/E ratio premium is significant

When the 10-year U.S. Treasury yield is below 3%, the utility sector's P/E ratio exhibits a significant premium. This relationship reveals the close connection between the utility sector and the interest rate environment. Utility companies typically have stable cash flows and high dividend yields, making them more attractive in a low-interest-rate environment. When U.S. Treasury yields are low, investors tend to seek assets that can provide higher returns, and utility stocks, due to their defensive and stable income characteristics, become one of the ideal choices.

Therefore, the market assigns higher P/E ratio valuations to utility stocks, reflecting investors' preference for these assets in a low-interest-rate environment. This valuation premium phenomenon provides an important reference indicator for investors to assess utility stocks under different interest rate environments, helping them seize investment opportunities and determine reasonable pricing levels

Figure 3

Summary and Outlook: Defensive Allocation Requires "Both Offense and Defense"

Goldman Sachs recommends that against the backdrop of energy transition and macro volatility, investors should prioritize targets with stable cash flow, healthy balance sheets, and leadership in niche markets, while also paying attention to elastic opportunities arising from mid-term supply-demand mismatches (such as a rebound in crude oil). The seven major sectors and recommended stocks provide a multi-layered defense solution for the current market