In a recent report, Goldman Sachs strategists stated that as economic conditions normalize, the premium on high-quality US stocks is declining.

The Wall Street giant emphasized that currently the premium on 'quality' stocks is at historically high levels, reflecting strong demand in the market for companies with excellent performance in terms of capital return, profit margins, and balance sheet. The widening profit gap among companies in the S&P 500 index has been a key driving factor for this valuation premium.

Goldman Sachs stated that the current profit gap, especially the gap between the stocks with the highest and lowest ROE (Return on Equity), has reached 45 percentage points, approaching the largest gap since the 1980s.

Strategists stated in a report, "Currently, the long position of our industry-neutral return indicators (based on roi, assets roi, and roe to classify stocks) has a valuation premium of 56%. Compared to history, this premium is currently at the 97th percentile."Compared to history, this premium is currently at the 97th percentile."Compared to history, this premium is currently at the 97th percentile."

However, Goldman Sachs believes that these excessive premiums may begin to revert to historical norms, especially as long as the economic growth remains strong and the Federal Reserve continues its monetary easing cycle.

The report points out, "Paying excessive premiums for profitability and other 'quality' factors seems unreasonable, especially against the backdrop of strong GDP growth and the Federal Reserve initiating a rate-cutting cycle."

Goldman Sachs also notes that declining labor costs and interest rates may support ROE in the short term, thereby reducing the demand from investors to pay a premium for quality.

The strategist explained, "Corporate borrowing costs usually lag behind changes in interest rates." With the yield on 10-year US Treasury bonds peaking in October 2023 and subsequently falling, borrowing costs should also decline, no longer posing a short-term obstacle to ROE.

For this week, Goldman Sachs analyst team led by David Kostin wrote that if the strong employment data released by the US Labor Department on Friday may prompt some investors to "lower their expectations for a significant weakening of the labor market," causing them to "shift funds from expensive 'quality' stocks to less popular low-quality companies."

Due to investors betting on the support of loose monetary policy, the US economy has been able to avoid a recession, and the US stock market has returned to historic highs. The non-farm payroll report is the focus of the market this week, with expectations that the report will show a healthy labor market but a slower pace of growth.

Analysis of foreign media factors shows that the so-called quality strategy (investors targeting the most profitable stocks) is one of the five best-performing strategies in the US this year.

Michael Wilson of Morgan Stanley recently pointed out that the impact of the labor market on the stock market will be greater than the outlook for interest rates. The strategist reiterated in a report last Sunday that he prefers large cap stocks and higher quality industries.

Editor/new