Goldman Sachs: Quality stock rebound is suppressed, but some US stocks have already fallen into "entry opportunities"

According to the Zhitong Finance APP, a team led by Goldman Sachs U.S. equity strategist David Kostin stated that the recent rebound of "quality" factors (i.e., a series of stocks with high return on equity, low leverage, and stable earnings characteristics) is still constrained by high short positions and a moderate macroeconomic outlook, which has not provided investors with enough impetus to shift back to defensive, quality stocks. In the past week, quality indicators rose by about 4%, but this slight rebound came after a significant decline of 17% since July, marking one of the most severe declines in recent years outside of the pandemic period. Kostin's team attributed the summer's indicator decline mainly to a round of strong short covering and a shift in investor preference towards "low-quality" stocks, which are often heavily shorted. In a report submitted to clients on October 24, strategists wrote: "Since the market hit a low in April, those heavily shorted U.S. stock portfolios have doubled and have risen over 30% since early September. Quality factors typically perform poorly under significant short covering pressure, as low-quality stocks are often popular short targets." Macroeconomic Conditions Suppress Quality Stock Rotation Goldman Sachs expects moderate growth in the U.S. economy and that the Federal Reserve will continue to cut interest rates until 2026, which reduces the relative attractiveness of defensive, quality stocks. The bank forecasts that S&P 500 earnings will grow by 7% in 2025 and 2026, with a target level of 6800 points by the end of 2025 and a 12-month target of 7200 points, indicating limited upside from current levels. Kostin noted that the recent decline in quality factors has exceeded the impact of macroeconomic factors by about 10%, suggesting that their drop "far exceeds levels determined solely by fundamentals." However, Goldman Sachs still cautioned that neither economic data nor policy signals show signs of a reversal in the short term. The report stated: "From a macro perspective... moderate growth and loose policies have not provided investors with sufficient reasons to shift back to seeking relatively safe investment options." Valuations Remain High Despite the pullback, the valuations of quality stocks remain at high levels. Goldman Sachs' analysis shows that the price of its quality stock basket is 25 times its expected earnings—more than double the 12 times price-to-earnings ratio of low-quality stocks. This brings the valuation gap close to its highest levels in recent years. In the quality assessment framework, the prices of profitability and low volatility factors remain very high, while the robustness of balance sheets appears to be reasonably priced. Meanwhile, according to data from the U.S. Financial Industry Regulatory Authority cited by Goldman Sachs, short positions in the S&P 500 remain high, with an average of 2.3% of market capitalization sold short—far above historical averages, indicating that "the situation of short covering may continue." Emergence of Quality Low-Priced Stocks Despite the overall market factors still facing pressure, Goldman Sachs pointed out that after the recent sell-off, some high-quality companies are currently trading at a discount. These companies include members of the firm's quality stocks and quality growth stocks basket, such as Adobe (ADBE.US), FIS (FI.US), PepsiCo (PEP.US), and S&P Global (SPGI.US), whose stock prices have fallen at least 10% from their 52-week highs and have price-to-earnings ratios below their five-year median. The median expectation for these stocks is that earnings per share will grow by 11% by 2026, indicating that despite facing overall adverse factors, there are still some selectable investment opportunities for long-term investors. Earnings Season: Strong Performance, Tepid Reaction As of October 24, 29% of S&P 500 constituents have reported their third-quarter results, with 69% of companies exceeding analyst expectations, and the extent of the beats exceeding one standard deviation, well above the long-term average. However, the average performance of stocks that reported better-than-expected results lagged the index by 33 basis points the following day, indicating that the strong performance has largely been digested by the market. The upcoming week will be the busiest period of earnings season, with approximately 44% of the market capitalization of the S&P 500 set to report earnings, including major tech companies such as Microsoft (MSFT.US), Google (GOOGL.US), Meta (META.US), Apple (AAPL.US), and Amazon (AMZN.US). Goldman Sachs believes that given the high valuations, strong short positions, and a macro environment favoring cyclical industries over defensive ones, the upside potential for quality stocks in the short term is limited. However, strategists suggest that the recent poor performance may provide investors with an opportunity to buy selected "quality blended stocks" at more attractive price levels. Although the likelihood of an overall rebound in quality indicators is low, Goldman Sachs states that some high-quality stocks are currently trading below their fundamental values