- A Goldman Sachs note from September 6 shares a scenario in which growth stocks can outperform.
- The plot would require stable or falling interest rates and a slow but growing economy.
- Within the growth sector, the investment bank favors firms with high profitability.
While the broad market has taken an overall hit, investors historically flee to value over growth stocks in times of economic trouble. The S&P 500 value index of relatively cheaper stocks is down by about 9% year-to-date, while the S&P 500 growth index of fast-growing names is down 22% over the same period.
Goldman Sachs believes economic growth will remain slow but positive, and that interest rates will rise modestly during the coming year. This supports the argument in favor of value.
A September 6 note from Goldman revisits the relationship between value and growth stocks in the current environment. It suggests that value will outperform in the coming years. However, there is a scenario where growth stocks could outperform value. The two ideal conditions for that plot to play out would be stable or falling interest rates and a slow but growing economy. While a soft landing from the Fed is necessary, it’s not sufficient, strategists led by David Kostin said.
Consequently, these conditions — lower real rates and a growing economy — would make growth stocks an attractive investment play.
Below is Goldman’s list of 17 growth stocks, excluding financials, real estate, and energy names, that had paths to profitability and low valuations as of September 2, 2022.
Goldman included each stock’s market capitalization, first and fourth-quarter earnings per share (EPS), and the last 12 months of its enterprise value-to-Sales (EV/Sales) in November 2021 and now. The latter metric helps investors value a company by its sales while also factoring in equity and debt. In a sign of how attractively valued these stocks are to Goldman’s team, the EV/Sales ratio is lower now compared to last November in all instances.