The ongoing trade war between the U.S. and China is weighing heavily on the global economy and is unlikely to end any time soon. Investors looking to shelter themselves from the collateral damage should buy service-providing stocks and avoid goods-producing ones, according to a recent report from Goldman Sachs. 

The top 10 stocks in Goldman’s services-providing basket include: Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), Berkshire Hathaway Inc. (BRK.B), Facebook Inc. (FB), JPMorgan Chase & Co. (JPM), Visa Inc. (V), Walmart Inc. (WMT), Mastercard Inc. (MA), and Bank of America Corp. (BAC).

What it Means for Investors

Goldman’s own in-house U.S.-China Trade Tension Barometer has collapsed as the intensity of trade concerns implied by the equity market has exploded. In April, the barometer indicated an 80% likelihood that a trade deal would be reached. That likelihood has plummeted and is now sitting at around 13%. 

Trump’s threat of a 10% tariff on an additional $300 billion worth of Chinese goods is set to come into effect on September 1. China’s retaliation in the form of a yuan devaluation is raising the risks that the trade war turns into an all out currency war. Goldman’s economists believe a trade agreement is unlikely to happen before the Presidential election in November of next year.

While the bank’s analysts don’t see a recession hitting the U.S. economy in the near term, they do suggest investors shield themselves by weighting their portfolios toward service-providing companies as opposed goods-producing companies. The ongoing trade dispute between the world’s two largest economies is taking a much greater toll on the fundamentals of goods-producing firms due to their much heavier exposure to foreign trade.

“Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-US sales exposure than Goods firms,” wrote Goldman’s analysts led by David Kostin.

Services stocks, up 21% since the start of the year, have already outperformed goods stocks, which are up 16% on the year. Since the start of the third quarter, services stocks are up 0.8% while goods stocks are down -0.9%. Services firms are exhibiting faster sales and earnings growth, as well as more stable gross margins compared to goods firms.

Looking Ahead

Goldman also proposes investors shift towards stocks with lower labor costs, expecting further interest rate cuts by the Federal Reserve amid a still-growing economy and relatively tight labor market to result in upward pressure on wages. Stocks of companies with low labor costs compared to those with high labor costs are much more insulated from margin pressures.