Stocks got back on the horse on Wednesday, with both the Dow and S&P 500 indexes finishing at their second-highest levels ever, as investors continue to smile on strong economic growth prospects.
Strategists at Goldman Sachs are bullish on the U.S. economy, expecting sequential annualized U.S. gross domestic product growth to clock in at 10.5% in the second quarter of 2021. That would be the strongest quarterly growth rate since 1978 (outside of the surge in mid-late 2020, when the economy rebounded from a sudden halt).
But it may not be good for stocks. Our call of the day is from the team at Goldman Sachs, led by Ben Snider, who warns that as economic growth peaks, investors should expect lower equity returns and higher volatility.
Economists at the investment bank see U.S. GDP growth slowing modestly in the third quarter of this year before continuing to decline across the next several quarters.
"Decelerating growth is usually associated with weaker, but still positive, equity returns and higher volatility," the strategists say. Since 1980, the S&P 500 has seen average monthly returns of 1.2% when economic growth was positive and accelerating, but just 0.6% when growth was positive but decelerating.
In fact, stocks underperform just when growth peaks. Investors who bought the S&P 500 when the Institute for Supply Management manufacturing index was above 60 -- signaling peak growth, the strategists say -- saw median returns of -1% in the next month and just 3% over the following year. In March, the ISM manufacturing index clocked in at 65.
But it isn't all bad news. Outside of the U.S., the global economy is still on a tear. Economists at Goldman Sachs expect economic growth in Europe, Japan, and emerging markets outside of China to peak later than in the U.S. -- in the third quarter of this year. "As a result, some cyclical parts of the U.S. equity market should fare better in coming months than they typically do when U.S. growth begins to slow," the strategists say.
Goldman Sachs has two pieces of advice: Buy global-facing cyclicals relative to domestic-facing cyclicals and buy a basket of "Europe reopening" stocks, which have lagged behind "U.S. reopening" stocks.
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