Stocks are near their all-time highs. They are still good investments, says Goldman Sachs.
Experts at the investment bank say that rapidly rising earnings could keep pushing up stock prices and that investors should use buffer exchange-traded funds and dividend stocks to manage risk rather than fleeing equities.
That isn’t necessarily an easy message right now. Investors are nervous about the numerous risks that could hit stocks and the economy. High oil prices and persistent inflation fears. The possibility that this will push the Federal Reserve to raise interest rates. Worries about artificial-intelligence disrupting software and other sectors.
“The most frequent question I get from investors is ‘How do I reconcile what I read in the news every day with how the market is doing?’ There are so many risks and stocks grind higher,”said Greg Calnon, head of public investing at Goldman Sachs Asset Management at an event at Goldman’s New York headquarters Wednesday. “It’s all about earnings.”
Calnon noted that earnings for the companies in the S&P 500 were up more than 28% in the first quarter. “That’s an incredible number,” he said, adding that even after you back out technology stocks from that figure, earnings were still up an impressive 14%.
Still, investors can’t ignore the fact that stocks have had an impressive run. Valuations are on the higher side of historical norms. That’s a reason why Goldman recommends investors look more at dividend-paying stocks to generate yield.
“Income is an incredible ballast to a portfolio in times of stress,” said Alexandra Wilson-Elizondo, Goldman Sachs Asset Management’s co-chief investment officer and co-head of multi-asset solutions.
Goldman also recommends so-called defined outcome or buffer funds in order to reduce risk. These type of funds limit the upside that an investor may get in a bull market by capping gains at a certain level and then use options to reduce downside. Goldman recently acquired Innovator Capital Management, a provider of defined outcome ETFs such as the Innovator Defined Wealth Shield ETF. The deal closed last month.
“There is still a lot of money going into bonds and money market funds. People are fearful,” said Graham Day, president of Innovator ETFs. “Ultra high-net worth clients want more risk management and are willing to give up some upside for more certainty.”
But at the end of the day, Goldman doesn’t think investors should be too nervous. As long as companies continue to post solid gains in revenue and earnings, even in the face of many macro worries, then the prudent call is to stay in the market.
Wilson-Elizondo said she is often asked by investors if disruption from AI is the biggest risk facing the market. She turns that question around.
“Not investing in AI over the past year has been the biggest mistake,” she said, adding that investors shouldn’t be “freezing” at a time like this.
So even though Goldman Sachs just bought a company that specializes on protecting investors from down markets, the company remains bullish on what’s next for stocks.
Write to Paul R. La Monica at paul.lamonica@barrons.com