Goldman Sachs: Quality stocks rebound is suppressed, but some US stocks have fallen to the "entry opportunity"

Goldman Sachs Group, Inc. team led by U.S. stock strategist David Kostin stated that the recent rebound of "quality" factors (namely a series of stocks with high stock return rates, low leverage, and stable profit characteristics) is still limited by the high level of short positions and moderate macroeconomic outlooks. This outlook has not provided enough momentum for investors to switch back to defensive, high-quality stocks. In the past week, the quality index has risen by about 4%, but this slight recovery came after a significant 17% drop since July, marking one of the most severe declines in recent years apart from the epidemic period. Kostin's team attributed the summer index decline mainly to a strong shorting spree and investors shifting their preferences towards "low-quality" stocks, which are often heavily shorted. In a report submitted to clients on October 24, strategists wrote, "Since the market hit its low point in April, the heavily shorted U.S. stock portfolios have doubled in value and have risen by over 30% since early September. Quality factors typically perform poorly under heavy short selling pressure because low-quality stocks are often popular short targets." Macro challenges dampen rotation in quality stocks Goldman Sachs Group, Inc. expects moderate growth in the U.S. economy and continuous rate cuts by the Fed until 2026, reducing the relative attractiveness of defensive, high-quality stocks. The bank predicts that the S&P 500's earnings will grow by 7% in 2025 and 2026, with a year-end target level of 6800 points in 2025 and a 12-month target level of 7200 points, indicating limited upside from current levels. Kostin noted that the recent decline in quality factors has exceeded the impact of macroeconomic factors by about 10%, indicating that its decline "far exceeds levels determined purely by fundamentals." However, Goldman Sachs Group, Inc. still warns that there are no signs of a near-term reversal in either economic data or policy signals. The report stated, "Pursuing relatively safe investment choices is not enough to provide investors with adequate reason to turn back to defensive, high-quality stocks." Valuations remain high Despite some pullbacks, valuations of quality stocks remain at relatively high levels. Goldman Sachs Group, Inc.'s analysis shows that the stock price of their quality stock basket is 25 times their expected earnings, over double the 12 times price-to-earnings ratio of low-quality stocks in similar products. This makes the valuation gap close to the highest level in recent years. In the quality assessment system, pricing for profitability and low volatility factors remains very high, while balance sheet strength seems relatively reasonable. At the same time, according to data from the American Financial Group, Inc. regulatory agency cited by Goldman Sachs Group, Inc., short positions in the S&P 500 index are still high, with an average of 2.3% of market value being shortedfar above historical averages, indicating that the shorting situation may continue. Emergence of quality at low prices Despite overall market pressures, Goldman Sachs Group, Inc. points out that after recent sell-offs, some quality companies are currently trading at discounted prices. These companies include members of the company's quality stock and quality growth stock baskets like Adobe (ADBE.US), Voya Financial Services (FI.US), PepsiCo, Inc. (PEP.US), and S&P Global, Inc. (SPGI.US), whose stock prices have fallen at least 10% from their 52-week highs and have price-to-earnings ratios lower than their five-year median. The median expectations for these stocks indicate a 11% increase in earnings per share in 2026, suggesting that despite overall adverse factors, there are still some investment opportunities for long-term investors. Earnings season: Strong performance, muted reaction As of October 24, 29% of S&P 500 companies have reported their third-quarter earnings, with 69% beating analyst expectations by more than one standard deviation, far above the long-term average. However, the average performance of stocks that beat expectations the day after being announced was 33 basis points behind the index, indicating that strong earnings have already been largely priced in by the market. The upcoming week will be the busiest period of the earnings season, with about 44% of market cap companies in the S&P 500 index set to report earnings, including large tech companies like Microsoft Corporation (MSFT.US), Alphabet Inc. Class C (GOOGL.US), Meta (META.US), Apple Inc. (AAPL.US), and Amazon.com, Inc. (AMZN.US). Goldman Sachs Group, Inc. believes that due to high valuations, strong short positions, and a macro environment favoring cyclical industries rather than defensive ones, the short-term upside for quality stocks is limited. However, strategists suggest that the recent underperformance may provide investors with an opportunity to buy select "quality blended stocks" at more attractive prices. Although the overall likelihood of a rebound in quality indicators is slim, some high-quality stocks are currently trading below their intrinsic value, according to Goldman Sachs Group, Inc.