Goldman Sachs's model recommends overweights in these sectors

Investing.com -- The S&P 500 declined by 2% this week following a more hawkish-than-expected FOMC meeting. The updated dot plot revealed a median projection of two interest rate cuts in 2025, falling short of the three cuts anticipated by consensus.

According to Goldman Sachs, the decline in the S&P 500 “was broadly consistent with the historical experience of real yields rising sharply."

This week, Goldman Sachs introduced a new sector model aimed at evaluating U.S. equities. The model estimates the likelihood that an equal-weighted sector will outperform the broader equal-weighted S&P 500 index by at least five percentage points over the next six months. By using equal-weighted returns, the model addresses concerns over record-high market concentration in U.S. equities.

Sectors where the model assigns a greater than 50% probability of outperforming are considered “overweights.” The model focuses on sectors expected to outperform by at least five percentage points to highlight high-conviction opportunities with significant alpha potential. Macro (BCBA:BMAm ), fundamental, and valuation data serve as key inputs.

Currently, the model recommends overweights in Materials, Software (ETR:SOWGn ) & Services, Health Care, Utilities, and Real Estate . Macro assumptions in the model are aligned with Goldman Sachs' economists' forecasts.

“The model implies the highest conviction overweights in Materials and Software & Services. In addition, the model suggests Industrials and Tech Hardware have the lowest probability of outperforming the S&P 500 by 5 pp or more during the next 6 months,” strategists led by David J. Kostin noted.

The firm’s model recommends overweighting defensive sectors, driven by the optimism already reflected in equity markets.

While economists forecast above-consensus U.S. growth for 2025, Cyclicals—excluding commodities—have outperformed Defensives by 5 percentage points since Election Day, aligning with unrealistically high growth expectations. This dynamic makes the risk/reward profile more favorable for defensives like Utilities, Goldman highlights.

In addition to offering defensive qualities, Utilities are poised to benefit from the AI-driven surge in power demand, particularly for unregulated companies, reinforcing their appeal amid market conditions.

Health Care screens are attractive based on macro factors, but policy uncertainty around Medicaid, drug pricing, and leadership at U.S. Department of Health and Human Services (HHS) could weigh on valuations, strategists warn, which are already at historical lows.

Meanwhile, Real Estate benefits from expected economic growth and falling bond yields, but higher yields remain a key risk to performance.

Materials have lagged the cyclical rally, with oil prices expected to stay range-bound, while higher metals prices offer selective opportunities. Weak global growth and potential tariffs add downside risk.

Software & Services remains a high-conviction overweight, driven by exposure to AI and secular growth themes, with valuations seen as less restrictive to performance.

Source: Investing.com