Goldman Sachs strategists anticipate a favorable outlook for the S&P 500's return on equity (ROE) in 2024, driven by potential improvements in profit margins.
The team foresees a slight expansion in ROE, primarily attributed to enhancements in EBIT (earnings before interest and taxes) margins.
The commencement of Federal Reserve easing is identified as a significant factor mitigating risks associated with higher borrowing costs. The strategists highlight this development as a catalyst for a shift in investor preferences.
They expect investors to pivot away from stocks that currently boast high profitability for safer options, towards those with the potential for greater profitability in the future.
“We expect investors will rotate away from stocks that offer the safety of high profitability today towards those which offer the potential for greater profitability in the future,” the strategists said in a note.
This shift is likely to be influenced by the anticipation of improved profit margins and reduced headwinds from taxes and borrowing costs.
Drawing on historical trends, the strategists suggest that stocks with weaker margins may outperform in the current year, aligning with the anticipated changes in investor sentiment and market dynamics.