S&P 500 faces high dispersion, with quality stocks leading the charge: Goldman Sachs

The Standard & Poor’s 500 stock index (SP500) has gained 8% year-to-date, but a closer look reveals significant disparities within the broader equity market, according to a recent report by David Kostin, strategist at Goldman Sachs.

While the index itself is within 1% of its record high, the median stock remains 12% below its 52-week peak. This divergence highlights a market marked by substantial stock-level dispersion, with investors gravitating towards certain themes and sectors, such as artificial intelligence, large-cap stocks and industrials, while largely avoiding others, including small-caps and most defensive sectors.

The dispersion of stock returns in the S&P 500 (SP500) has reached historically high levels, according to Goldman’s August 8 report. The three-month return dispersion for the index has surged to 36 percentage points, placing it in the 82nd percentile compared with the past 30 years. This wide variation in returns is seen across nine of the 11 sectors, where return dispersion ranks above the 70th percentile.

Valuation gap

One of the most notable trends in the current market is the extreme valuation gap between “quality” stocks and lower-quality ones. Quality stocks, defined by attributes like high profit margins and strong balance sheets, are currently trading at a 57% price-to-earnings premium over their lower-quality counterparts. This valuation gap ranks in the 94th percentile since 1995, signaling investor preference for stable, financially strong companies.

Kostin said that while such extreme valuations haven’t consistently been predictive of short-term returns, they can offer insights into the potential distribution of those returns. Historically, when the quality factor valuation premium has been above 40%, the factor has never risen by more than 10% over the following 12 months.

Below-trend growth forecasted

Looking ahead, Goldman’s economists forecast below-trend growth coupled with above-target inflation in the coming months, which is likely to continue favoring quality stocks. However, they also expect this inflationary pressure and economic slowdown to be temporary.

Given the current asymmetry in valuations, Kostin suggests that investors should be cautious of a potential sharp rotation toward lower-quality stocks if economic and earnings growth proves more resilient than anticipated.

For investors uncertain about the near-term macroeconomic outlook, Kostin highlights 25 stocks that are likely to be influenced more by company-specific factors than broader economic trends. These stocks, driven by idiosyncratic factors, could offer more protection in an environment marked by uncertainty.

Stocks with strong balance sheets, high returns on capital, low volatility and high margins: Goldman Sachs
S&P 500 stocks that rank in the top 40% relative to sector peers on each metric
Ticker	Name	Sector	Market Cap ($bn)	12 Month Return	NTM P/E	Altman Z-Score	ROE	Volatility	Margin
(NVDA)	NVIDIA Corp.	Information Technology	4,409	35%	35x	86	80%	53%	52%
(MSFT)	Microsoft Corp.	Information Technology	3,871	24%	33x	11	29%	25%	36%
(AAPL)	Apple Inc.	Information Technology	3,286	-12%	28x	9	173%	32%	24%
(GOOGL) (GOOG)	Alphabet Inc.	Communication Services	2,226	4%	19x	13	30%	31%	31%
(PG)	Procter & Gamble	Consumer Staples	360	-7%	22x	5	30%	19%	19%
(KO)	Coca-Cola Co.	Consumer Staples	303	15%	23x	4	48%	17%	26%
(LIN)	Linde plc	Materials	221	13%	27x	4	19%	18%	20%
(BKNG)	Booking Holdings	Consumer Discretionary	177	10%	22x	7	NM	28%	19%
(ISRG)	Intuitive Surgical	Health Care	168	-10%	53x	47	16%	33%	29%
ADBE)	Adobe Inc.	Information Technology	144	-24%	15x	9	66%	34%	30%
(COP)	ConocoPhillips	Energy	117	-5%	14x	3	11%	34%	16%
(MO)	Altria Group Inc.	Consumer Staples	107	26%	12x	5	NM	20%	43%
(CTAS)	Cintas Corp.	Industrials	90	23%	45x	14	38%	25%	18%
(SHW)	Sherwin-Williams	Materials	88	3%	29x	4	67%	24%	11%
(ECL)	Ecolab Inc.	Materials	76	16%	33x	5	22%	19%	14%
(ITW)	Illinois Tool Works	Industrials	75	3%	24x	8	98%	21%	21%
(CL)	Colgate-Palmolive	Consumer Staples	69	-5%	22x	6	508%	20%	15%
(ZTS)	Zoetis Inc.	Health Care	66	-8%	22x	7	54%	26%	28%
(EOG)	EOG Resources Inc.	Energy	63	-3%	11x	4	19%	29%	26%
(FAST)	Fastenal Co.	Industrials	54	34%	40x	33	32%	25%	15%
(PAYX)	Paychex Inc.	Industrials	51	2%	25x	5	43%	24%	30%
(CPRT)	Copart Inc.	Industrials	45	-20%	27x	32	16%	27%	32%
(RMD)	ResMed Inc.	Health Care	41	23%	25x	15	23%	29%	27%
(VLTO)	Veralto Corp.	Industrials	27	6%	27x	5	34%	21%	17%
(FOXA)	Fox Corp.	Communication Services	18	11%	13x	3	18%	26%	14%
(PKG)	Packaging of America	Materials	17	-12%	18x	5	19%	25%	10%
List Median			$89	4%	24x	7	31%	25%	23%
S&P 500 Median			37	4%	19x	4	18%	29%	10%
Source: Goldman Sachs Investment Research, FactSet