‘Don’t fight the Fed,’ Goldman says. These stocks can benefit from higher inflation.
U.S. stocks look set to start Monday on the back foot ahead of key inflation data and earnings reports later in the week.
Fears over rising COVID-19 cases and vaccination problems, after a Chinese government official said the effectiveness of its vaccines was low, has put equity markets under pressure.
However, the partial reopening of the U.K. and upbeat comments from Federal Reserve Chair Jerome Powell provided some positivity. Investors will also be awaiting consumer price data on Tuesday and earnings from major banks JPMorgan Chase, Goldman Sachs and Wells Fargo later this week.
After a delay on Friday, the U.S. Labor Department said the producer-price index, a key measure of inflation, rose 1% in March — the biggest annual increase since 2011.
In our call of the day, Goldman Sachs strategists said higher inflation was on the cards in the coming months, which could boost companies with high pricing power.
“‘Don’t fight the Fed’ is a quip investors have learned to ignore at their peril. What the central bank wants is usually what it gets, sooner or later,” the strategists said, noting that the Fed’s intervention a year ago sparked the 80% rally that has lifted the S&P 500 SPX,
The Fed now wants higher inflation, they said. The investment bank’s economics team expected inflation readings to climb in the coming months, peaking at 2.3% in April, before sitting below 2% until 2023.
When it comes to the impact on stocks, Goldman said it was all about margins, adding that some companies were protecting margins by passing higher costs along to their consumers.
The strategists, led by David Kostin, said companies with low pricing power have historically outperformed when S&P 500 profit margins are expanding. In contrast, companies with high pricing power have “sharply lagged” during the past year. However, rising inflation could mean that is about to change, and companies with high pricing power are set to benefit, the strategists said.
Goldman screened for stocks with high pricing power — high and stable gross margins relative to sector peers. The screen produced 55 stocks, including videogames company Activision Blizzard ATVI,
Separately, with first-quarter earnings seasons getting under way next week, Goldman expected aggregated sales growth of 5% and earnings per share (EPS) growth of 19%. But that won’t matter much, its strategists added. “The trajectory of the economic recovery will continue to make backward-looking metrics less relevant for the forward-looking market,” they said.
The next issue dominating investor discussions is President Joe Biden’s plan to boost corporate tax to 28%, Goldman said. The full adoption of Biden’s proposals would see 2022 annual S&P 500 EPS growth of 12% fall to just 5%, they added.
The tweet
Higher producer prices are positively linked to S&P 500 earnings, according to this chart from Jeroen Blokland, senior portfolio manager at Robeco Asset Management.
The markets
U.S. stock futures ES00,
The buzz
Powell said “it will be a while” before the central bank taps the brakes on the economy, in an interview on “60 Minutes” on Sunday.
Tech giant Microsoft MSFT,
Pub gardens, hair salons, gyms and nonessential shops will open in England on Monday for the first time since early January, as the U.K. takes the next step on its path to reopening.
Alibaba 9988,
Italian diagnostic specialist DiaSorin DIA,
Random reads
Drinkers brave the cold for midnight pints as pubs in England reopen.
Bafta best supporting actress winner Yuh-Jung Youn calls British people “snobbish.”
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.
