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Let's talk about what's going on in stocks right now with the chief US stock strategist over at Goldman Sachs. David Costin joins us. I'm pleased to say it right here on Open Interest. David, thanks so much for your time. Last week. You were the first major strategists to lower your S and P five hundred price target. You cut your year end forecast to sixty two hundred from sixty five hundred. Just tell me, first off, what's behind the call and are you worried about a slowdown in earnings.
Well, the genesis for why we reduced our year end target is really a function of greater uncertainty and slow down.
In economic activity.
Those are two key inputs into our earnings model, and that's also a component of our evaluation model. So the bottom line is we're looking for earnings growth in counter twenty twenty five of plus seven percent and seven percent growth in twenty twenty six, so two years about seven
percent growth. Previously, we had anticipated around nine percent growth this year, and the key driver behind that is a slower economic forecast for the US economic output, and as a result, we have a lower year in target around six thousand, two hundred, So it's a similar kind of return as we anticipated before, but just.
From a lower level.
And obviously recognize that that's a challenging situation because the tariff.
Assumptions we're making.
We're now assuming that the tariff rate is going to increase by around ten percentage points. It's consistent with our UH colleagues in US economics research, and so the tariff rate MATT in the coming year will be around thirteen percent model Previously we had assumed around three percent.
So those are the really the three building blocks. The slower in his growth largely.
Driven by slower economic activity and a higher tariff rate, and then a slightly lower PE multiple ascribed to the year end growth.
For next year.
You know, David, the sentiment sentiment out there is brutal, and you see it in some of the big tech stocks. The Magnificent seven today is down getting close to three percent just today alone. You have started calling this the maleficent seven. Is that how you say magnificently malficent? That's right, I think delicent maleficent seven. And you know what can
happen to turn that around? Of anything? What are the broader market, implications for sentiment, and what has been the darling sector in the market to turn so low.
Well, I think the proper way to think about this is that the extraordinary returns for the US equity market over the last two years has really been driven to a meaningful amount by the seven large companies that are sober k the Magnificent seven.
Unfortunately, from a portfolio.
Management perspective, it's been maleficent seven. It's been the real source of pain in the market this year. And without those companies, which are down roughly twelve percent year to date, the rest of the market is actually up. The four hundred and ninety three remaining stocks are up around one
percent year to date. So it gives you some context around the importance the influence that these companies have had on the broader market, the idea of these companies, the uncertainty around some of the regulatory environment, the source of when the hedge fund community in particular, which is largely invested, tilting their portfolios towards these companies, that's been a source
of selling. On the other hand, about sixty percent of large cap mutual funds are actually outperforming their benchmarks because they've historically or traditionally been underweight these stocks. So it has had differing implications for different groups of the clients of Golden Sachs, and it's an important way to think about our outlook for this year.
Is the idea of a broadening of the market.
That's been central to our forecast and outlook for investment strategy for twenty twenty five. The idea that a broadening of the market is likely to a place in that has been a little bit consistent with what we were anticipating, the idea of if people.
I met, well, I was just gonna say, you know, broadening, that sounds great, and I hope you're right about it, but there's still got to be some leadership, right and if it's not the magnificent or maleficent seven you know Nvidia right now leading declines as the Nasdaq one hundred falls almost two percent, who takes over who does the heavy heavy lifting here in a rebound?
Well, the point you identified correctly is that about a third of the market cap of the S and P five hundred of these seven companies, so clearly they have a just apportioned impact seven companies, you know, more than thirty percent of the index.
You can get it broaden of the.
Market in other ways, which is a greater uplift in the typical stock. You can see that in healthcare companies they actually done pretty well. You've had some defensives, generally done well. This is an area we've been focusing on with respect to, you know, discussion with fund managers of how to position their portfolios.
In this market. Specifically, what we're looking for is what are.
The three drivers of the market that have been afflicting the companies. This year has been a question about where we are in the AI transition, and we've gone obviously, Navidia.
Terrific story, terrific company from.
A stock point of view, was really an extraordinary driver of performance in the last couple of years. Obviously that's moved a little bit in the other direction. Well, that is sort of phase one of what we think of as the AI transition. Phase two, which is the infrastructure where a lot of the hyperscalers are located in that
sort of category utility companies. Really companies are involved in the build out of the infrastructure for AI, and really the focus of fund managers now has shifted to the third phase, which.
Is the applications.
A lot of the software companies stocks down dramatically last year. They've actually been an area of focus for portfolio managers.
That's where we're.
Focused one issue I think for portfolio managers and what you're saying, actually there's a silver lining and that if you have mutual funds finally outperforming because you have a broadening of the market, that's actually great for your retirement account because of the diversification many fas financial advisors have on. But a lot of the trades this year that have done well are really really defensive, and even then at this moment, people are having a really hard time buying
the dip. So what is your advice?
What are you.
Telling clients who are looking to take advantage of the fact that the market has fallen so much when they don't know what the low is.
First of all, Sonalo, we have to put this in context.
In any year, the typical drawdown is ten percent. In any year, you typically get to peak the truck drawdown at some point of ten percent. Well, that's what we've got, So it's not so extraordinary, and it's largely driven by some of these biggest companies we just been speaking about absent that the typical stock is down maybe five percent.
So where are we focused. We're focused on a couple of things.
Number one, what are some stocks that are insensitive to some of the drivers of the market, some of the idea of economic activity, the idea of it potentially slowing down, the idea of concerns about the return on capital that
so much of the AI story has made based upon. Well, there are companies where they're trading in the last six months have really been less sensitive to regulatory environment uncertainty around the economy, amdocs, MSCI, you can think of a companies in different a lot of healthcare companies there they have traded in a pattern that has been unrelated to some of the key drawdown sources, which has been a reassessment of how fast the economy will grow focus on
the AI. So there's a bunch of companies, we call it our insensitive portfolio, stocks that have not disprayed price sensitivity to some of these bigger themes that have been buffeting the market in the last several months. So that's a strategy to be thinking about for this environment. For those football managers who are consistent with our view, which
is the economy is still growing. The market is going to end the market like to end the market, you know, the year higher than it is today, six two hundred. There are some stocks that are really not so sensitive to what's been happening in the day to day news flow.
We'll look to the insensitive portfolio in the meanwhile, when you cut your S and P target, you raised your target on Europe's stock six hundred or the outlook. At least there are you saying this is like the go to trade because it certainly has been working.
It certainly has been working.
That question really relates to what's the longer term investment strategy. And we've been focusing for a while on the US exceptionalism story and the idea that US companies have a dramatically higher reinvestment rate of their cash flow. I give you a example of the last decade. On average, US companies reinvest around forty percent of their cash flow back into their business to grow the business, whereas the rest of the world stock markets it's around twenty five percent.
That's a pretty meaningful gap, and that gap can persist.
A year after year after year.
So the idea of companies US companies investing for the longer term is something that's unique.
Characteristic of US companies. That's one area why from a longer term.
Perspective, US socks likely they continued to do better. They've obviously been a source of awesome performance for the last fifteen years.
The valuation has come down slightly, but the.
Earnest growth still in the United States of seven percent MATT is going to be much greater than you're getting in Europe. Europe's really had a valuation recovery off of below, but it's still US companies will have faster growth, and admittedly they trade at a higher multiple, and they're also investing more to have that growth persist.
David, We thank you so very much to joining for joining us today. Of course, it has been a tough trade out there. That is, David Costin of Golden Sacks early to make that call that things this year might not be as rosy as we came in the year believing they would be.