WEBVTT - Goldman Sach's David Kostin Talks Stocks, Markets 0:00:02.720 --> 0:00:07.280 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.200 --> 0:00:10.400 Let's talk about what's going on in stocks right now 0:00:10.480 --> 0:00:14.320 with the chief US stock strategist over at Goldman Sachs. 0:00:14.400 --> 0:00:16.800 David Costin joins us. I'm pleased to say it right 0:00:16.840 --> 0:00:20.240 here on Open Interest. David, thanks so much for your time. 0:00:20.720 --> 0:00:24.520 Last week. You were the first major strategists to lower 0:00:24.560 --> 0:00:26.920 your S and P five hundred price target. You cut 0:00:26.920 --> 0:00:30.120 your year end forecast to sixty two hundred from sixty 0:00:30.400 --> 0:00:34.280 five hundred. Just tell me, first off, what's behind the 0:00:34.320 --> 0:00:37.680 call and are you worried about a slowdown in earnings. 0:00:38.320 --> 0:00:41.879 Well, the genesis for why we reduced our year end 0:00:41.920 --> 0:00:46.680 target is really a function of greater uncertainty and slow down. 0:00:46.440 --> 0:00:47.599 In economic activity. 0:00:47.960 --> 0:00:51.360 Those are two key inputs into our earnings model, and 0:00:51.400 --> 0:00:53.880 that's also a component of our evaluation model. So the 0:00:53.880 --> 0:00:57.640 bottom line is we're looking for earnings growth in counter 0:00:57.720 --> 0:01:01.520 twenty twenty five of plus seven percent and seven percent 0:01:01.560 --> 0:01:04.319 growth in twenty twenty six, so two years about seven 0:01:04.319 --> 0:01:07.760 percent growth. Previously, we had anticipated around nine percent growth 0:01:07.760 --> 0:01:10.560 this year, and the key driver behind that is a 0:01:10.560 --> 0:01:16.920 slower economic forecast for the US economic output, and as 0:01:16.920 --> 0:01:20.319 a result, we have a lower year in target around 0:01:20.319 --> 0:01:22.600 six thousand, two hundred, So it's a similar kind of 0:01:22.600 --> 0:01:24.440 return as we anticipated before, but just. 0:01:24.360 --> 0:01:25.440 From a lower level. 0:01:25.480 --> 0:01:31.520 And obviously recognize that that's a challenging situation because the tariff. 0:01:32.280 --> 0:01:33.360 Assumptions we're making. 0:01:33.880 --> 0:01:36.680 We're now assuming that the tariff rate is going to 0:01:36.760 --> 0:01:40.400 increase by around ten percentage points. It's consistent with our 0:01:40.480 --> 0:01:43.080 UH colleagues in US economics research, and so the tariff 0:01:43.160 --> 0:01:45.920 rate MATT in the coming year will be around thirteen 0:01:45.959 --> 0:01:48.800 percent model Previously we had assumed around three percent. 0:01:49.000 --> 0:01:50.880 So those are the really the three building blocks. The 0:01:50.880 --> 0:01:52.680 slower in his growth largely. 0:01:52.440 --> 0:01:55.440 Driven by slower economic activity and a higher tariff rate, 0:01:55.640 --> 0:01:58.840 and then a slightly lower PE multiple ascribed to the 0:01:59.160 --> 0:02:00.160 year end growth. 0:02:00.360 --> 0:02:01.040 For next year. 0:02:01.160 --> 0:02:04.480 You know, David, the sentiment sentiment out there is brutal, 0:02:04.720 --> 0:02:07.120 and you see it in some of the big tech stocks. 0:02:07.120 --> 0:02:10.119 The Magnificent seven today is down getting close to three 0:02:10.160 --> 0:02:13.680 percent just today alone. You have started calling this the 0:02:13.760 --> 0:02:17.480 maleficent seven. Is that how you say magnificently malficent? That's right, 0:02:17.560 --> 0:02:21.880 I think delicent maleficent seven. And you know what can 0:02:22.400 --> 0:02:25.120 happen to turn that around? Of anything? What are the 0:02:25.160 --> 0:02:29.320 broader market, implications for sentiment, and what has been the 0:02:29.400 --> 0:02:32.400 darling sector in the market to turn so low. 0:02:34.120 --> 0:02:36.639 Well, I think the proper way to think about this 0:02:36.960 --> 0:02:40.520 is that the extraordinary returns for the US equity market 0:02:40.560 --> 0:02:43.120 over the last two years has really been driven to 0:02:43.200 --> 0:02:46.760 a meaningful amount by the seven large companies that are 0:02:47.320 --> 0:02:49.000 sober k the Magnificent seven. 0:02:49.480 --> 0:02:51.160 Unfortunately, from a portfolio. 0:02:50.680 --> 0:02:54.240 Management perspective, it's been maleficent seven. It's been the real 0:02:54.360 --> 0:02:58.080 source of pain in the market this year. And without 0:02:58.520 --> 0:03:01.799 those companies, which are down roughly twelve percent year to date, 0:03:03.040 --> 0:03:05.440 the rest of the market is actually up. The four 0:03:05.480 --> 0:03:07.480 hundred and ninety three remaining stocks are up around one 0:03:07.480 --> 0:03:10.160 percent year to date. So it gives you some context 0:03:10.240 --> 0:03:13.600 around the importance the influence that these companies have had 0:03:13.600 --> 0:03:18.320 on the broader market, the idea of these companies, the 0:03:18.400 --> 0:03:23.160 uncertainty around some of the regulatory environment, the source of 0:03:23.200 --> 0:03:27.400 when the hedge fund community in particular, which is largely invested, 0:03:27.639 --> 0:03:30.720 tilting their portfolios towards these companies, that's been a source 0:03:30.760 --> 0:03:34.280 of selling. On the other hand, about sixty percent of 0:03:34.520 --> 0:03:37.640 large cap mutual funds are actually outperforming their benchmarks because 0:03:37.640 --> 0:03:41.120 they've historically or traditionally been underweight these stocks. So it 0:03:41.160 --> 0:03:45.720 has had differing implications for different groups of the clients 0:03:45.720 --> 0:03:48.120 of Golden Sachs, and it's an important way to think 0:03:48.160 --> 0:03:49.680 about our outlook for this year. 0:03:49.800 --> 0:03:51.840 Is the idea of a broadening of the market. 0:03:51.840 --> 0:03:55.240 That's been central to our forecast and outlook for investment 0:03:55.280 --> 0:03:58.320 strategy for twenty twenty five. The idea that a broadening 0:03:58.360 --> 0:03:59.960 of the market is likely to a place in that 0:04:00.040 --> 0:04:03.200 has been a little bit consistent with what we were anticipating, 0:04:03.680 --> 0:04:05.280 the idea of if people. 0:04:05.080 --> 0:04:07.160 I met, well, I was just gonna say, you know, broadening, 0:04:07.280 --> 0:04:10.120 that sounds great, and I hope you're right about it, 0:04:10.160 --> 0:04:13.440 but there's still got to be some leadership, right and 0:04:13.840 --> 0:04:18.160 if it's not the magnificent or maleficent seven you know 0:04:18.360 --> 0:04:21.919 Nvidia right now leading declines as the Nasdaq one hundred 0:04:22.000 --> 0:04:26.159 falls almost two percent, who takes over who does the 0:04:26.200 --> 0:04:28.800 heavy heavy lifting here in a rebound? 0:04:30.120 --> 0:04:33.359 Well, the point you identified correctly is that about a 0:04:33.400 --> 0:04:35.599 third of the market cap of the S and P 0:04:35.640 --> 0:04:38.360 five hundred of these seven companies, so clearly they have 0:04:38.400 --> 0:04:41.120 a just apportioned impact seven companies, you know, more than 0:04:41.160 --> 0:04:42.480 thirty percent of the index. 0:04:42.640 --> 0:04:43.760 You can get it broaden of the. 0:04:43.720 --> 0:04:48.760 Market in other ways, which is a greater uplift in 0:04:49.000 --> 0:04:51.400 the typical stock. You can see that in healthcare companies 0:04:51.440 --> 0:04:55.000 they actually done pretty well. You've had some defensives, generally 0:04:55.040 --> 0:04:57.800 done well. This is an area we've been focusing on 0:04:57.880 --> 0:05:01.240 with respect to, you know, discussion with fund managers of 0:05:01.279 --> 0:05:04.080 how to position their portfolios. 0:05:03.640 --> 0:05:06.480 In this market. Specifically, what we're looking for is what are. 0:05:06.400 --> 0:05:10.440 The three drivers of the market that have been afflicting 0:05:10.600 --> 0:05:13.200 the companies. This year has been a question about where 0:05:13.240 --> 0:05:18.360 we are in the AI transition, and we've gone obviously, Navidia. 0:05:18.120 --> 0:05:20.000 Terrific story, terrific company from. 0:05:19.800 --> 0:05:23.400 A stock point of view, was really an extraordinary driver 0:05:23.480 --> 0:05:25.640 of performance in the last couple of years. Obviously that's 0:05:25.640 --> 0:05:27.640 moved a little bit in the other direction. Well, that 0:05:27.800 --> 0:05:29.560 is sort of phase one of what we think of 0:05:29.600 --> 0:05:32.920 as the AI transition. Phase two, which is the infrastructure 0:05:33.320 --> 0:05:35.359 where a lot of the hyperscalers are located in that 0:05:35.440 --> 0:05:39.720 sort of category utility companies. Really companies are involved in 0:05:39.760 --> 0:05:43.000 the build out of the infrastructure for AI, and really 0:05:43.040 --> 0:05:45.719 the focus of fund managers now has shifted to the 0:05:45.760 --> 0:05:46.800 third phase, which. 0:05:46.600 --> 0:05:47.800 Is the applications. 0:05:47.839 --> 0:05:50.800 A lot of the software companies stocks down dramatically last year. 0:05:50.839 --> 0:05:53.960 They've actually been an area of focus for portfolio managers. 0:05:54.680 --> 0:05:55.360 That's where we're. 0:05:55.200 --> 0:05:57.840 Focused one issue I think for portfolio managers and what 0:05:57.839 --> 0:06:00.640 you're saying, actually there's a silver lining and that if 0:06:00.640 --> 0:06:04.800 you have mutual funds finally outperforming because you have a 0:06:04.839 --> 0:06:07.200 broadening of the market, that's actually great for your retirement 0:06:07.200 --> 0:06:11.440 account because of the diversification many fas financial advisors have on. 0:06:11.880 --> 0:06:13.919 But a lot of the trades this year that have 0:06:14.000 --> 0:06:17.800 done well are really really defensive, and even then at 0:06:17.800 --> 0:06:21.040 this moment, people are having a really hard time buying 0:06:21.360 --> 0:06:24.800 the dip. So what is your advice? 0:06:24.880 --> 0:06:25.400 What are you. 0:06:25.520 --> 0:06:28.880 Telling clients who are looking to take advantage of the 0:06:28.880 --> 0:06:31.800 fact that the market has fallen so much when they 0:06:31.839 --> 0:06:33.120 don't know what the low is. 0:06:34.520 --> 0:06:36.640 First of all, Sonalo, we have to put this in context. 0:06:37.000 --> 0:06:41.560 In any year, the typical drawdown is ten percent. In 0:06:41.600 --> 0:06:43.760 any year, you typically get to peak the truck drawdown 0:06:43.760 --> 0:06:45.920 at some point of ten percent. Well, that's what we've got, 0:06:46.200 --> 0:06:49.560 So it's not so extraordinary, and it's largely driven by 0:06:49.600 --> 0:06:51.839 some of these biggest companies we just been speaking about 0:06:52.040 --> 0:06:54.800 absent that the typical stock is down maybe five percent. 0:06:54.920 --> 0:06:56.920 So where are we focused. We're focused on a couple 0:06:56.960 --> 0:06:57.200 of things. 0:06:57.279 --> 0:07:02.080 Number one, what are some stocks that are insensitive to 0:07:02.520 --> 0:07:04.440 some of the drivers of the market, some of the 0:07:04.440 --> 0:07:08.120 idea of economic activity, the idea of it potentially slowing down, 0:07:08.279 --> 0:07:12.280 the idea of concerns about the return on capital that 0:07:12.640 --> 0:07:15.560 so much of the AI story has made based upon. Well, 0:07:15.600 --> 0:07:18.520 there are companies where they're trading in the last six 0:07:18.560 --> 0:07:22.360 months have really been less sensitive to regulatory environment uncertainty 0:07:22.360 --> 0:07:26.240 around the economy, amdocs, MSCI, you can think of a 0:07:26.320 --> 0:07:28.880 companies in different a lot of healthcare companies there they 0:07:28.920 --> 0:07:32.680 have traded in a pattern that has been unrelated to 0:07:32.800 --> 0:07:35.320 some of the key drawdown sources, which has been a 0:07:35.680 --> 0:07:38.760 reassessment of how fast the economy will grow focus on 0:07:38.800 --> 0:07:40.920 the AI. So there's a bunch of companies, we call 0:07:40.920 --> 0:07:44.600 it our insensitive portfolio, stocks that have not disprayed price 0:07:44.720 --> 0:07:46.880 sensitivity to some of these bigger themes that have been 0:07:47.680 --> 0:07:50.920 buffeting the market in the last several months. So that's 0:07:50.960 --> 0:07:54.120 a strategy to be thinking about for this environment. For 0:07:54.120 --> 0:07:56.760 those football managers who are consistent with our view, which 0:07:56.800 --> 0:07:59.240 is the economy is still growing. The market is going 0:07:59.240 --> 0:08:01.120 to end the market like to end the market, you know, 0:08:01.160 --> 0:08:03.840 the year higher than it is today, six two hundred. 0:08:04.360 --> 0:08:07.280 There are some stocks that are really not so sensitive 0:08:07.280 --> 0:08:09.720 to what's been happening in the day to day news flow. 0:08:09.760 --> 0:08:13.360 We'll look to the insensitive portfolio in the meanwhile, when 0:08:13.400 --> 0:08:16.200 you cut your S and P target, you raised your 0:08:16.600 --> 0:08:18.960 target on Europe's stock six hundred or the outlook. At 0:08:19.040 --> 0:08:22.320 least there are you saying this is like the go 0:08:22.400 --> 0:08:24.560 to trade because it certainly has been working. 0:08:26.440 --> 0:08:27.640 It certainly has been working. 0:08:27.800 --> 0:08:32.000 That question really relates to what's the longer term investment strategy. 0:08:32.040 --> 0:08:34.360 And we've been focusing for a while on the US 0:08:34.480 --> 0:08:38.240 exceptionalism story and the idea that US companies have a 0:08:38.480 --> 0:08:43.120 dramatically higher reinvestment rate of their cash flow. I give 0:08:43.120 --> 0:08:45.640 you a example of the last decade. On average, US 0:08:45.720 --> 0:08:49.520 companies reinvest around forty percent of their cash flow back 0:08:49.520 --> 0:08:51.600 into their business to grow the business, whereas the rest 0:08:51.600 --> 0:08:54.000 of the world stock markets it's around twenty five percent. 0:08:54.200 --> 0:08:58.960 That's a pretty meaningful gap, and that gap can persist. 0:08:58.679 --> 0:08:59.679 A year after year after year. 0:08:59.720 --> 0:09:02.640 So the idea of companies US companies investing for the 0:09:02.679 --> 0:09:05.599 longer term is something that's unique. 0:09:05.480 --> 0:09:09.000 Characteristic of US companies. That's one area why from a 0:09:09.040 --> 0:09:09.560 longer term. 0:09:09.520 --> 0:09:12.720 Perspective, US socks likely they continued to do better. They've 0:09:12.720 --> 0:09:16.160 obviously been a source of awesome performance for the last 0:09:16.160 --> 0:09:17.040 fifteen years. 0:09:17.720 --> 0:09:20.600 The valuation has come down slightly, but the. 0:09:20.559 --> 0:09:23.240 Earnest growth still in the United States of seven percent 0:09:23.320 --> 0:09:25.640 MATT is going to be much greater than you're getting 0:09:25.679 --> 0:09:29.640 in Europe. Europe's really had a valuation recovery off of below, 0:09:29.880 --> 0:09:33.400 but it's still US companies will have faster growth, and 0:09:33.440 --> 0:09:36.120 admittedly they trade at a higher multiple, and they're also 0:09:36.160 --> 0:09:38.360 investing more to have that growth persist. 0:09:38.720 --> 0:09:41.720 David, We thank you so very much to joining for 0:09:41.760 --> 0:09:43.439 joining us today. Of course, it has been a tough 0:09:43.679 --> 0:09:46.319 trade out there. That is, David Costin of Golden Sacks 0:09:46.400 --> 0:09:49.360 early to make that call that things this year might 0:09:49.360 --> 0:09:51.920 not be as rosy as we came in the year 0:09:51.960 --> 0:09:52.720 believing they would be.