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“Price/earnings multiples in sectors with strong secular growth, such as Info Tech, show little correlation with 10-year U.S. Treasury yields since 2011; their valuations can move higher in low-rate environments (because of their long duration) or high-rate environments (because of their high near-term growth expectations),” strategists led by Ryan Hammond wrote in a note June 29.
Growth expectations for the near-term become more important when rates rise in a low-rate environment, Goldman said, noting that the firm’s rates strategists see expansion expectations lifting 10-year U.S. Treasury yields by 45 basis points through year-end. That boosts cyclical shares, insulates long-duration equities with high growth, and weighs on defensive stocks.
Goldman sees net upside risk to S&P 500 multiples and prices if monetary policy remains loose and growth expectations improve, which it envisions as the most likely scenario.
“High multiples of Software & Services appear supported by fundamentals, while Household & Personal Products valuations are stretched,” the strategists said.
Goldman also looked at U.S. stocks’ valuations based on factors including their equity duration, near-term growth expectations and margins. Those trading at the biggest discounts to their modeled valuation include Bristol-Myers Squibb (NYSE:BMY) Co., Cigna Corp (NYSE:CI). and Western Digital Corp (NASDAQ:WDC)., they said. Those trading richest versus the models included Expedia (NASDAQ:EXPE) Group Inc., Abiomed (NASDAQ:ABMD) Corp. and Netflix Inc (NASDAQ:NFLX)., they said.
©2020 Bloomberg L.P.
