US Stock Differentiation Reaches a High Point in 30 Years, Goldman Sachs Recommends 25 "Quality-Driven Stocks"

Goldman Sachs strategist David Kostin pointed out in a recent report that although the S&P 500 index has risen by 8% year-to-date, a closer look reveals significant differentiation within the overall US stock market. Currently, the index is only 1% away from its historical high, but the median stock is still 12% below its 52-week high. This deviation highlights a clear trend of individual stock differentiation in the market: investors are flocking to specific themes and sectors such as artificial intelligence, large caps, and industrials, while generally avoiding small caps and most defensive sectors. Goldman Sachs' report on August 8th showed that stock returns in the S&P 500 index have reached historical highs in terms of differentiation. The three-month return dispersion of the index has soared to 36 percentage points, placing it at the 82nd percentile in historical data over the past 30 years. This return differentiation is widespread, with 9 out of 11 industries experiencing such dispersion, with returns above the 70th percentile. Widening valuation gap One of the most significant trends in the current market is the extreme valuation gap between "quality stocks" and low-quality stocks. Quality stocks characterized by high profit margins and strong balance sheets currently trade at a 57% price-to-earnings premium compared to low-quality stocks. This valuation gap ranks at the 94th percentile in data since 1995, reflecting investors' preference for financially stable quality companies. Kostin stated that while such extreme valuations may not always reliably predict short-term returns, they can provide reference for the potential distribution of returns. Historical data shows that when the valuation premium of quality factors exceeds 40%, the subsequent 12-month return has never exceeded 10%. Economic growth expected to be below trend Looking ahead, Goldman Sachs economists predict that the US economic growth in the coming months will be below trend, while inflation remains above target, which may continue to benefit quality stocks. However, they also believe that the current inflation pressures and economic slowdown may be temporary. Given the current asymmetry in valuations, Kostin advises investors to be cautious of the risk of funds abruptly shifting towards low-quality stocks if the economy and profit growth show unexpected resilience. For investors skeptical of short-term macroeconomic prospects, Kostin particularly recommends 25 stocks - these stocks are more likely to be influenced by company-specific factors rather than overall economic trends. In a market environment full of uncertainty, these stocks driven by individual characteristics may provide stronger defensiveness.