Materials, software stocks are best poised for H1 outperformance: Goldman Sachs

Stocks of companies in the materials and the software and services industries are best poised to outperform the broader market in the next six months, analysts at financial-services firm Goldman Sachs said in a report.

They introduced a model for U.S. stocks to pick industries that are poised to outperform an equal-weighted index by 5 percentage points or more “to identify ‘high conviction’ views with significant alpha potential,” David Kostin, strategist at Goldman Sachs, said in a Dec. 20 report.

“Our model incorporates macro, fundamental and valuation data as independent variables,” he said. “We run the probit model for each sector separately and only include variables with statistical and economic significance. Our model does not capture fiscal policy changes or secular themes such as artificial intelligence.”

Defensive Overweights

The model’s highest-conviction picks are in materials and in software and services, while it also currently recommends overweights in health care, utilities and real estate.

“Our model recommends a large number of defensive overweights in part because of the level of economic growth optimism already priced into the equity market today,” according to Goldman Sachs.

The materials industry this year didn’t participate in the cyclical rally, but some companies are poised to gain amid a projected rise in the price of gold and silver.

“Weak non-U.S. growth and tariffs represent risks to the sector. Materials underperformed during key tariff announcements during the 2018-2019 trade war,” Goldman Sachs said. “However, the sector’s low starting valuation suggests some pessimism is already priced in.”

Software and services are positioned to benefit from what is described as a “hand-off” from one phase of artificial intelligence adoption to another – in this case from building infrastructure such as data centers to AI-enabled revenues.

“For investors who may be skeptical about the ability of companies to monetize AI, a return of investor focus to non-AI secular growth would likely also translate into demand for many software and services firms,” Goldman Sachs said.