“A sharp increase in bond yields from current levels presents an additional meaningful risk for equity investors,” he adds.
Is the stock market at risk of falling?
Oppenheimer points to some other reasons stock investors should be cautious. Momentum rallies (rapid gains in stocks as investors buy companies that are already performing well) across regions have reflected strong underlying profit growth. But these rallies also raise the risks of a stock correction amid deteriorating GDP growth and rising inflation.
At the same time, Goldman Sachs Research’s Risk Appetite Indicator reached its highest level since 2021 (its reading of 1.1 last week was in its 99th percentile since 1991).
“Rising optimism is also reflected in the surge in retail participation, particularly in the US,” Oppenheimer adds. The firm’s trading desk estimates that retail trading volumes have risen by 28% since mid-April.
What are the best opportunities for stock investments?
While the risk of a stock correction in the near term is rising, Oppenheimer says that shifts in the distribution of the market’s winners and losers could present opportunities for investors.
For nearly 15 years, stock market returns followed a pattern: the US outperformed other regions, technology outperformed other sectors, and growth-oriented stocks outperformed value-oriented ones.
That pattern is now breaking down, Oppenheimer writes. Rising long-term interest rates—reflecting a combination of rising term premium and rising government debt burdens—have reduced the value of very long duration growth stocks (fast-growing companies expected to have substantial profits far in the future). The increase in interest rates is also undermining the valuations of “defensive” and “quality” parts of the equity market, which are most sensitive to interest rates and were largely valued as proxies for bonds.
At the same time, there’s been a dramatic increase in capital spending (capex), primarily by major US hyperscalers. That marks a major shift from the decade and a half after the global financial crisis when there was little appetite or incentive for companies to invest heavily in capex, according to Goldman Sachs Research.
The sharp increase in capital spending is benefiting not just chipmakers and technology hardware companies but also traditional industrial and energy businesses involved in building physical infrastructure. “The old pattern of US, technology, and growth outperformance has given way to a more eclectic mix of returns across geographies, sectors, and factors,” Oppenheimer writes.
Are HALO stocks a good investment?
As a result, companies with heavy physical assets but low risk of obsolescence (sometimes called HALO stocks) are being favored by investors at a time when they are increasingly worried about the impact of increased competition on capital-light businesses. “For the first time in many years we see emerging pockets of value in the growth space and emerging pockets of growth in the value parts of the market,” Oppenheimer writes.
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