Goldman Sachs Says S&P 500's Epic Bounce Is Set to Peter Out

(Bloomberg) -- Goldman Sachs is warning that this year’s U.S. stock rally is set to stall after equities rebounded from last year’s drop at the fastest clip in at least seven decades.

The S&P 500 Index’s 17 percent surge from a Christmas Eve low means the pace of gains has surpassed the previous 10 recoveries from declines of about 20 percent since World War II, the firm’s data showed. If history is any guide, the bank warned, the benchmark index is likely to stay flat over the next three to six months.

Goldman Sachs Says S&P 500's Epic Bounce Is Set to Peter Out

The firm’s model tracking economic activity and financial market performance suggests concerns over a recession and Federal Reserve monetary tightening that gripped investors in the fourth quarter have evaporated. In their place is confidence over stable growth and a dovish central bank, leaving little room for positive surprises, according to strategists led by Ryan Hammond and David Kostin. With the market upside likely capped for now, investors should shift their focus to discerning winners and losers among stocks, they said.

“S&P 500 returns will be more modest in the near term,” the strategists wrote in a note to clients released Tuesday. “We expect stock returns will become more micro-driven and recommend investors focus on relative value and idiosyncratic (‘alpha’) opportunities.”

The S&P 500 fell 0.3 percent as of 12:13 p.m. in New York, poised to halt a four-day gain, after retail sales unexpectedly fell in December. The index closed at 2,753 Wednesday, already topping Goldman Sachs’ target of 2,750 for the first half of this year. The firm’s year-end target is 3,100, a 13 percent increase from current levels.

By advocating stock picking over making bets on the broad market, the strategists are echoing a budding trend in the stock market: a reversal of years of passive investing. In January, index-tracking exchange-traded funds saw withdrawals totaling $32 billion, four times the amount of outflows for actively managed mutual funds. While bigger ETF outflows are nothing new in the month following a market meltdown, strategists at Goldman Sachs say investors should continue to avoid riding the market.

As the firm’s model shows, individual stocks tend to factor in different levels of company-specific risk, a characteristic the strategists define as “dispersion score.” Investors should focus on those that are more likely to respond to their idiosyncratic news, good or bad, because that means better “alpha,” or above-market returns.

Goldman says the industries it identified as having the most plentiful stock picking opportunities include: consumer discretionary, communication services and health care.

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