Goldman Sachs says the market is due for a large but temporary rotation out of growth stocks

• Goldman Sachs says the market is due for a temporary but large rotation out of growth stocks into cyclical and value stocks. 
• Goldman expects bond yields to rise and economic growth to improve in the next few months, and they said this will trigger a rotation. 
• The firm upgraded bank stocks and auto stocks to “overweight,” as these sectors are the most sensitive to rates and growth. Food, beverages, and tobacco were downgraded to “underweight.” 
• Goldman added that over the medium and long term, rates will stay relatively low due to the low levels of underlying inflation. Therefore, this rotation will be short-lived.

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The market may be poised for a temporary rotation out of growth stocks into stocks more sensitive to upcoming macroeconomic changes, according to a Thursday note from Goldman Sachs 

The firm highlighted that since the great financial crisis in 2008, there have been 15 rotations into cyclicals and out of defensive stocks. On average these rotations lasted for four months and resulted in 15% outperformance for cyclical stocks. 

Rising bond yields and improving economic growth can trigger these rotations, and Goldman expects both of these to occur in the next few months, especially if a vaccine for COVID-19 is announced.

The firm added when cyclicals and value stocks outperform, growth and defensive stocks don’t necessarily fall, but they tend to underperform.

Given these conditions, Goldman upgraded bank stocks and auto stocks to “overweight.” The firm said: “This is the most sensitive sector to rates and growth and, despite low underlying returns in recent years, we think it offers exceptional value.”

Goldman also downgraded technology to “neutral” to reflect a “near-term bounce” in value stocks.

“We retain a neutral as we continue to believe that in a low nominal growth world the market will continue to pay a premium for reliable top-line and bottom-line growth,” and tech can deliver that, they said.

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Food, beverages, and tobacco were downgraded to “underweight,” because of the sector’s sensitivity to rising rates and an improvement in economic growth.

Over the medium and longer term, however, Goldman said it thinks rates will stay relatively low and the rotation out of growth stocks won’t represent a secular trend. 

“The low levels of underlying inflation and the pressures on governments from high debt burdens militate against a sustained large rise in yields. Given this, we do not expect anything more than a short-lived rotation that lasts a few months, rather than a change in the secular trend,” Goldman said.