"Goldman Sachs U.S. stocks strategist is brushing off the talk of a more hawkish tone from Federal Reserve Chairwoman Janet Yellen.
The possibility of earlier-than-expected interest rate hikes was a surprise, said chief U.S. equity strategist David Kostin, but last week’s Fed statement didn’t “meaningfully change our positive medium-term outlook for the S&P 500.” The bank’s year-end target for the S&P 500 remains at 1900, which is 2.4% above where it was recently trading Monday.
And “concerns may be overstated as our economics team believes the first hike will not occur until early 2016, although the risks have shifted toward an earlier hike,” he said. He noted that while Treasury yields jumped on the news, the 10-year note’s yield was has been trading in a range between 2.8% and 2.6% since February, and remains well below its highs from late December.
Even though the possibility of higher interest rates could take a bite out of U.S. stock valuations in the short term, “investors don’t seem concerned with this either,” he said, noting that while the S&P 500 closed down 0.6% on Wednesday after the Fed statement and press conference, it rose 0.6% the following session.
Still, he recommends that investors look for stocks that benefit from rising bond market yields against a backdrop where he expects the yield on the 10-year U.S. Treasury to reach 3.25% by the end of this year".
Mr. Kostin sees one extra risk for stocks that is attracting less investor focus:
“Investors are focused on the near-term implications of interest rate hikes, but they should also be mindful of the long-term implications of a pick-up in wage growth, which should negatively affect margins.”
