Goldman Sachs Group Inc strategists said there is little reason to expect a major retreat in US stocks in the months ahead, even as the breadth of the rally that has pushed the S&P 500 index into successive records is getting increasingly narrow.
Just five stocks account for 51 percent of the US benchmark’s returns since April, Goldman’s strategists led by David Kostin wrote in a note to clients.
Those same stocks — Apple Inc, Microsoft Corp, Alphabet Inc, Nvidia Corp and Tesla Inc — together account for more than one-third of the gauge’s returns this year and more than one-fifth of its total market capitalization, according to the strategists.
The S&P 500 rose to another all-time-high on Friday, after a swift rebound from a post-Thanksgiving slump triggered by the spread of the Omicron variant of SARS-CoV-2. The highest year-on-year US inflation reading since 1982, and an increasingly hawkish tone from the US Federal Reserve, have not deterred investors from buying the dips.
The difference between the initial post-pandemic rebound and the recent gains is that the breadth of the rally has markedly narrowed, and this has been causing alarm, according to Goldman.
“Following periods of sharply narrowing market breadth — similar to the recent experience — equities have historically exhibited weaker-than-average returns and deeper drawdowns,” the strategists wrote.
Looking ahead though, there are few reasons to see why history would repeat itself this time.
“The macro environment does not suggest drawdown risk is elevated in the coming months,” the strategists wrote, highlighting that earnings and margins continue to surpass expectations, a low risk of recession and share prices already reflecting the likely Fed tightening.
“Nominal and real rates are expected to rise, but remain low over the coming months, supporting the backdrop for both valuation and equity demand,” the strategists said.
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