Goldman Sachs is advising investors concerned about a potential downturn in the AI trade to pivot towards defensive stocks in sectors like healthcare and consumer staples. This recommendation comes as rising interest rates and capital costs pressure growth expectations across the equity market.
The firm suggests focusing on ‘quality’ defensive stocks that have recently lagged the broader market. Companies like Tyson Foods and CVS Health are highlighted for their strong free cash flow yields and dividend potential, offering a potential hedge against economic uncertainty.
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Investors who are apprehensive about the sustainability of the artificial intelligence (AI) investment surge are being advised by Goldman Sachs to consider defensive sectors like healthcare and consumer staples. Analysts at the firm, led by Ben Snider, noted in a recent report that prolonged pressure from rising interest rates has led the equity market to recalibrate its growth expectations.
This recalibration, amplified by a significant reduction in investor positioning, has intensified market movements. Goldman Sachs observed that their 'Cyclicals vs. Defensives' pair has declined by 6% in the past two weeks, with similar pressures evident in the rates and credit markets.
Goldman estimates that AI capital spending currently accounts for approximately half of the S&P 500's earnings growth. However, they anticipate this contribution to diminish as spending growth slows. The bank's strategy for a defensive stance comes at a time when escalating energy prices and interest rates are casting a shadow over the economic outlook. The increased cost of capital raises questions about the long-term viability of the ongoing AI infrastructure buildout.
For investors anticipating a less optimistic economic outcome, Goldman Sachs suggests focusing on stocks within defensive industries that exhibit 'quality' attributes. They particularly recommend those that have recently underperformed the broader market.
Goldman Sachs' Defensive Stock Picks:
The investment bank highlighted several companies that met their screening criteria:
- Tyson Foods stood out with a trailing four-quarter free cash flow yield of 11%, the highest among the companies screened by Goldman. The food and beverage company's shares have seen a nearly 17% decline over the past six months, according to FactSet data. Tyson Foods also offers a dividend yield of 3.72%.
- CVS Health was also included due to its 9% free cash flow yield. While its stock has risen 15% year-to-date, it has experienced a 15% drop in the past three months. CVS Health provides a dividend yield of 2.88%, according to FactSet data.
It is important to note that Goldman Sachs' base case scenario still projects continued earnings growth. They foresee a potential rebound in consumer-facing stocks that have been recently beaten down. This recovery could be fueled by anticipated declines in energy prices and interest rates in 2027, according to their macroeconomic forecasts, which would bolster household spending.
