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Let's talk to David Costin from Golden Sachs.
He's the chief of US equity strategy there and or the chief US equity strategist, I should say, David, and it's great to get you on to talk about your expectations with the market, and I'd love to just get your take on the FED. You know, how important is the FED cutting cycle right now?
Is? I think everyone has reduced.
His or her expectations for the terminal rate.
What are you looking at? Well?
I have the benefit of working with the Golden Sachs economics team, and their forecast right now is a FED will cut next week as well as the beginning of next year. That's mostly priced into the market. The expectation for most portfolio managers with whom I interact on a regular basis are expecting an easy cycle to continue, and the stock market is pricing as though the underlying economic growth is close with a five percent. The economy, of course, is not growing.
As rapidly as that, but the.
Performance of cyclical stocks relative to defensive stocks is more consistent with a pretty robust economic underlying activity. In fact, that is what most of the fund managers are anticipating. The animal spirits have really been out in force.
In the last month.
We've seen the market rally by roughly five percent since the election. You saw recently the NFIB Small Business Optimism Index jump sharply. That's pretty consistent what we saw in the first Trump administration, the expectation of more business friendly environment. Whether that's true or not, of course, that remains to be seen. CEO confidence is typically highest in a unified republican government, so that also is I think one of
the reasons why you've seen it. We are expecting a twenty five percent increase in M and A activity next year. The CEO confidence is one of the key variables, along with financial conditions and economic activity. So those are some of the attributes around why business expectations are pretty strong. The economy is the stock market is pricing that, and we have expectations of roughly seven percent increase in the S and P five hundred during the next twelve months
to around six thousand, five hundred. So that's sort of the play lay of land Matt as we see it now.
David, what do you tell people who are following the animal spirits. Should they keep following the animal spirits or is there something more under the hood they should be looking at. Given that when we look at your analysis, you're taking a look at a very very specific set of stocks that should outperform, and not just the entire index.
So we have a couple of strategies that we think about in this environment. One we'd be companies whose customer base or customer clients are small and mid sized businesses. The intuition behind that is that companies that are small businesses are looking to spend more money in the idea of a more optimistic outlook. So if you're a supplier of those to those businesses, that's usually a good source of potential positive earning revisions.
More greater business.
A group of stocks that my colleague economic or stock analysts at Goldman have identified as a greater than average probability of being.
Acquired in a merger.
That's a strategy we published the other day last week looking at companies with a high risk adjusted return. The idea of the expected risk adjuster return being quite high in the coming year would be an appropriate strategy in our view, because the stock market trades at a very high valuation level, and there's a slight value bias or value tilts to a group of stocks with the highest
risk adjusted potential risk adjuster returns. And I think that's an important strategy to think about given the uncertainty scenario around and the tariffs, exactly what will happen with inflation, employment situation, So there's certain undercurrents of concern, and so the idea of choosing stocks with high risk adjuster return I think it's appropriate to set up a.
Portfolio at this time.
We think of it as terms of various delices of strategies.
I want to go back to the strategy you mentioned about stocks with a higher M and a potential. Obviously we've been talking about the antitrust, the regulatory environment that's expected in twenty twenty five, especially with a.
New FTC chair named.
Clearly there's a lot of interest among Wall Street firms in that. What are your conversations with clients around that sound? Have you also seen an increase in interest from investors to pursue that type of strategy we have?
In fact, the Goldman Sachs Financial Services Conference was held on Tuesday and Wednesday of this week, and there was quite a lot of the CEOs who were presenting, we're talking about the expectation they had for increased M and a activity incounter twenty twenty five. Investors as a consequence,
are also quite focused in this area. And we have a group of stocks where typically if you look at the S and P one thousand, five hundred, fifteen hundred, there's about a two percent of those companies get acquired each year, and a group of stocks to which I referred earlier, which my colleague analysts have identified as a greater than average probability. We about a nine percent hit
rate of acquisitions. Those stocks tend to outperform as you would anticipate receiving a usually a merger comes at a premium. That's been a driving force behind why we get lots of inquiries looking at this list of sixty two companies.
How do you look out, David for black swans.
I mean, we're in a situation where we really haven't had any for so long. The market's up almost thirty percent this year, the S and P at least, it was up twenty five percent last year, and it's had an incredible run since the bottom in two thousand and nine from six six six to over six thousand. What do you do to try and factor that into your models, the potential of an unknown unknown.
Well, since you referenced Donald Rumsfeld's famous dictum no knowns and no non knowns and non unknowns, that's ax question kind of hard to forecast.
A black swan will.
One way Matt to combat that or to tackle that problem would be to look at companies with a high risk adjusted return because that's factored into a certain grade, not a specific black swan event, but rather the idea.
Of overall risk.
The idea of a potentially high return adjusted for that risk. And that's a goal. That's the holy grail of all portfolio managers to get the best risk adjusted return that he or she can.
So what do we think about it? Well, we look at some of the big macro issues that are that are there and try.
To understand valuation. To set up with the stock market of trading at such high pe multiple does create you know, asymmetries in terms of downside risk if there's real disappointments on the underlying fundamental, So there's value has a potential
component in a portfolio. I think the way to think about is a a as a portfolio in a true portfolio sense, with multiple strategies in place, some that are maybe companies that are likely to have an M and activity, some that are forecast to have more customer based in small area that we talked about our risk adjusted returns.
Those combinations, I think is the right way to approach a market that trades at a very high valuation historically speaking, and that's I think that's how we would advocate and recommend to our clients.
David, we thank you so very much for joining us, of course, that is David Coston of Goldman Sachs. We thank you for your time