In what comes as a very worrying announcement for investors, Goldman Sachs has just said that it may be time to cash out of equities. Goldman says that the current mass rotation out of equities and into bonds mirrors what happened before the Crisis. “Decelerating US economic growth, trade and geopolitical uncertainty, and near-record high starting equity allocations have likely contributed to the rotation from equities to bonds and cash this year”, says Goldman. Any steadiness in equities will probably just be artificial. “The peak in buyback activity arrived in 2018 after the Trump administration’s tax cut fueled a wave of repurchase programs. Buybacks are projected to fall 15% in 2019, and drop another 5% in the following year”, Goldman said.
FINSUM: In principle this seems like a sound assessment. The problem is that all the worries Goldman is citing have been on the table for a while and yet stocks have been rising.
Over the last few years, Goldman Sachs has undertaken one of the biggest bets in its history. It is trying to change its DNA as a pillar of high finance to become a broad financial services company that includes a large consumer-facing business. This led to the launch of its new business, Marcus, which is a consumer investment and lending unit. So far, the results have not been pretty. The bank has lost about $1.3 bn from investing in Marcus, and the default rates on its loans have been much higher than average, causing it to pull back from the space somewhat. It has also caused a lot of internal tension at the bank, with many senior partners leaving as the company completely overhauls itself. On the positive side, the bank has pulled in $50 bn in consumer deposits, which is a new source of funding it never thought it would have access to.
FINSUM: Goldman’s stock is still at 2014 levels. That says it all.
Goldman Sachs just made a highly un-risky and entirely unremarkable call—they contend ecommerce will continue to grow at a good pace. However, within that contention, they also picked three stocks which represent the best way to play that growth. They prefer pure play ecommerce companies, and say that Amazon, Alibaba, and JD.com are the best names to buy in order to benefit from the continued rise of online shopping. According to Goldman, “Pure-play eCommerce companies like Amazon continue to benefit from greater access to consumer data and purchase history that enables not only compelling consumer experiences but also delivers efficiency and competitive benefits”.
FINSUM: These are certainly good ways to play ecommerce, but there are some other good angles too, such as logistics providers or warehousing stocks etc.
Not a day after warning about the unstable financial practices of S&P 500 companies, Goldman Sachs has just gone on the record saying that the S&P 500 is set for another round of big gains. The bank raised its year-end forecast for the index to 3,100. Goldman thinks that stocks are currently trading at fair valuations, and that “The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward”. The bank contends stocks will rise a further 10% in 2020.
FINSUM: We think stocks are going to move in line with the economy. If growth stays okay, and the Fed stays dovish, we are in for a move higher. We think the best odds are for a bull case.
Beyond high valuations and a potentially worrying economy (not to mention a trade war), there is something else investors need to worry about. Goldman Sachs is warning investors that S&P 500 companies are engaging in unsustainable financial payouts. The bank shows that in the year ending in March, companies in the index spent about 104% of their free cash flow on buybacks and dividends. It is the first time since before the Crisis that companies spent more on payouts than they generated in free cash flow.
FINSUM: So far this behavior is not hurting companies because investors are okay with extra leverage given the likelihood of Fed easing, but this is definitely a warning sign of financial excess.