The divergence in the US stock market has reached its highest level in 30 years, and Goldman Sachs recommends 25 "character-driven stocks."
Goldman Sachs strategist David Kostin pointed out that despite the S&P 500 index rising 8% this year, there is significant divergence within the U.S. stock market. The dispersion of individual stock returns has reached historical highs, particularly with a large valuation gap between high-quality and low-quality stocks. Goldman Sachs predicts that future U.S. economic growth will be below trend levels, and inflation will remain above target, which may continue to favor high-quality stocks. Kostin advises investors to pay attention to the risks of low-quality stocks
According to the Zhitong Finance APP, Goldman Sachs strategist David Kostin pointed out in a recent report that although the S&P 500 index has risen 8% year-to-date, a closer look reveals significant internal divergence within the overall U.S. stock market. Currently, the index is just 1% away from its historical high, but the median stock is still 12% below its 52-week high. This divergence highlights that the market is exhibiting clear characteristics of individual stock differentiation: investors are flocking to specific themes and sectors such as artificial intelligence, large-cap stocks, and industrials, while generally avoiding small-cap stocks and most defensive sectors.
Goldman Sachs' report on August 8 indicated that the divergence in individual stock returns within the S&P 500 index has reached a historical high. The three-month return dispersion of the index has surged to 36 percentage points, placing it in the 82nd percentile of historical data over the past 30 years. This return disparity is widespread, with 9 out of 11 sectors experiencing such divergence, all of which have return dispersion above the 70th percentile.
Widening Valuation Gap
One of the most notable trends in the current market is the extreme valuation gap between "quality stocks" and low-quality stocks. Quality stocks, characterized by high profit margins and strong balance sheets, currently enjoy a price-to-earnings ratio premium of 57% over low-quality stocks. This valuation gap is at the 94th percentile of data since 1995, reflecting investors' preference for financially sound quality companies.
Kostin stated that while such extreme valuations do not always reliably predict short-term returns, they can provide a reference for the potential distribution of returns. Historical data shows that when the valuation premium of quality factors exceeds 40%, the subsequent 12-month increase of that factor has never exceeded 10%.
Economic Growth Expected to Be Below Trend Levels
Looking ahead, Goldman Sachs economists predict that U.S. economic growth will be below trend levels in the coming months, while inflation remains above target. This environment may continue to favor quality stocks. However, they also believe that the current inflationary pressures and economic slowdown will be temporary.
Given the current asymmetry in valuations, Kostin advises that if economic and earnings growth demonstrates unexpected resilience, investors should be wary of the risk that funds may sharply shift towards low-quality stocks.
For investors skeptical about the short-term macroeconomic outlook, Kostin specifically recommends 25 stocks—these stocks are more likely to be influenced by company-specific factors rather than overall economic trends. In a market environment filled with uncertainty, these stocks driven by individual characteristics may provide stronger defensiveness.
