(Bloomberg) – As Wall Street debates the timing of Federal Reserve stimulus cuts, investors have already changed course, targeting companies with good balance sheets that can weather slower growth in the economy.
S&P 500 companies with strong balance sheets have outperformed those with weaker financial positions for three consecutive months, the longest period since May 2020, according to data compiled by Goldman Sachs Group Inc. and Bloomberg. This represents a turnaround from the start of 2021, when stocks of companies with impaired financial situations thrived as the economy reopened, outpacing quality companies by the largest share on record.
The shift in investor preference coincides with a slowdown in economic growth amid the resurgence of the virus. Hiring data on Friday was well below estimates, the latest in a series of weak numbers to emerge just as improved unemployment benefits in the United States are about to expire and the Federal Reserve is considering withdrawing support from the era of the pandemic. This recipe for slower growth could leave some undercapitalized companies vulnerable, increasing demand for companies with stronger finances.
“What we’ve positioned ourselves for is the end of maximum growth, maximum stimulus, maximum accommodative policy,” Emily Roland, co-director of investment strategy at John Hancock Investment Management, said by phone. “It’s companies that can avoid margin pressures as input costs rise, and all of that leads us to companies with big balance sheets and strong fundamentals, and that’s where we’ve really been overweight.”
The group that has been booming lately is the top 50 companies when compared to five financial ratios calculated by Goldman Sachs Group Inc. Among them, Adobe Inc. has soared 14% in the third quarter, while that Costco Wholesale Corp. has added 17%. and Alphabet Inc. is up 18%.
The rotation was evident in the five days leading up to the holiday weekend, when investors poured into the Nasdaq 100 index, heavily weighted in the technology sector, leading it to gain 1.4%. The S&P 500 lagged behind, up 0.6%. It hit an all-time high on Thursday before falling on weak employment data.
The summer romance with high-end companies has helped the group catch up with reopening favorites such as finance and real estate, which remain the best performers of the year. In the past three months, tech companies, which have large amounts of cash and generate billions of profits, have risen to the top of the leaderboard again.
Of course, not everyone is willing to give up cyclical trading just yet. Investors in exchange-traded funds (ETFs) have invested more than $ 1 billion this week in companies that would benefit from a continued increase in economic activity, suggesting that they are betting that the recovery will not. it will weaken by the end of the year.
At the same time, investors have clearly been nervous about the impact of the delta swing and the Fed’s phasing out plans, with stocks near record highs. Traders have increased protection against a market crash and shifted cash to quality names.
