It’s time for investors to capture a rise in equities as markets price in the end of the Federal Reserve hiking cycle, Goldman Sachs said. With the Silicon Valley Bank collapse last month, many investors are now expecting the end of the central bank’s aggressive inflation-fighting campaign. According to the futures market, policymakers are set to pivot after raising rates by 25 basis points once more in May. For traders, that could mean upside in markets. Historically speaking, stocks have rallied in the months immediately following the end of prior rate hiking cycles, Goldman Sachs’ David J. Kostin said in a Friday client note. Since 1983, the S & P 500 rose 8% on average in the three months after the end of rate hikes, and was up 5 out of 6 times, according to the note. Meanwhile, on a 12-month basis, the broader index rose 19% on average, up 5 out of 6 occasions, and adding more than 10% in each of those episodes. “US equities have generally rallied in the months following the end of past Fed tightening cycles,” Kostin wrote. The firm’s year-end forecast of 4,000 in the S & P 500 suggests any rally will be limited, according to Kostin. “Our baseline year-end S & P 500 forecast of 4000 represents no upside from today, in what would be a break with the historical pattern at the end of hiking cycles. Our economists’ baseline forecast assumes the last Fed hike this cycle will occur in June and the economy will thereafter experience a soft landing,” Kostin wrote. “While historical precedent suggests upside risk to our forecast for a flat equity market, we believe S & P 500 valuations and earnings each face specific headwinds in 2023 that will prevent nearterm returns from being as strong as usual at the end of previous tightening cycles,” Kostin wrote. Still, he reiterated that he does not expect a recession in his base case. The firm’s economists said there’s a 35% likelihood of a recession in the next 12 months, lower than the 60% consensus expectation. Given this backdrop, Goldman Sachs recommended some high-margin growth stocks that could benefit. Consumer discretionary names such as Las Vegas Sands made the list. The casino stock is up more than 22% this year. The firm has a 21% net margin and 24% sales growth. Morgan Stanley last month also said that it would stick with growth and recovery names such as Las Vegas Sands among gaming stocks. Solar stock Enphase Energy has high sales growth and net margins, according to Goldman Sachs. The stock is down 21% this year, but Raymond James said that means shares are poised to rally. Last month, Raymond James upgraded Enphase to outperform from market perform. Payroll company Paylocity shares also made the Goldman list. Shares are up slightly in 2023. Recently, the stock was upgraded to buy from neutral by DA Davidson, which said Paylocity has limited downside risk and has a more attractive valuation than in the past. Datadog shares were part of the group. The software stock is down more than 2% this year, but has high sales growth and net margins. Other stocks on this list include Airbnb and Eli Lilly.
