Over the past decade, as stocks sprang back from lows reached after the financial crisis and major indexes repeatedly hit new record highs, investors seemed to face few concerns. But as the economy reaches the later stages of its cycle, a wave of concerns are now weighing on investors as they try to decide where to invest next. In a recent report titled “Where to Invest Now,” Goldman Sachs provides conservative market expectations amid these growing troubles, including rising trade tensions, falling manufacturing growth and rising input costs. 

6 Concerns of Investors

 1. Domestic Politics Uncertainty   Staff turnover, elections, and special counsel investigation 
 2. International Relations   Protectionism and tariffs
 3. Economy  Decelerating manufacturing and service sector growth
 4. Inflation  Rising labor and commodity prices
 5. Interest Rates  Hawkish Fed continues monetary tightening
 6. Regulation/De-Regulation  Data privacy regulation risks

Weighty Fears

With an end-of-year target level of 2,850 for the S&P 500, Goldman does not see much upside left for the latter half of the year. With the S&P 500 only up 4.6% since the beginning of January, that target level leaves only another 1.9% potential rise for the next six months, a 6.5% overall return for the year. Such tepid expectations are the result of an investing climate weighed down by several fears.

In the sphere of U.S. politics, worries over senior staff turnover, the possibility of Democrats re-taking the House, and the ongoing Special Counsel investigation have all raised policy uncertainty. The threat of protectionism and tariffs has added to that uncertainty. (To read more, see: Trade War Could Tip US Into Full Recession: BofA.)

Rising input costs, in the form of higher wages, higher commodity prices rise and rising borrowing costs due to higher interest rates, are putting a squeeze on profit margins. Regulatory concerns, like those related to data privacy, also threaten to impose higher costs on firms. When the profitability outlook weakens, firms begin to hold off on new investment, especially in an environment of rising rates. The Purchasing Managers Index (PMI) shows decelerating growth in both the manufacturing and service sectors.

These concerns are weighing on expectations despite certain reasons to be optimistic, including beneficial tax-reform, health care and infrastructure legislation, some surveys indicating an improving economy, still relatively low inflation, and a Fed that is still relatively accommodative.

Where to Invest as Growth Slows

While Goldman Sachs still sees relatively strong earnings per share (EPS) growth for the rest of the year, ten out of the eleven sectors in the S&P 500 will see that growth decline in 2019, with Consumer Staples being the only sector where EPS growth will remain constant. The worst slowdowns are expected in the Energy, Financials, Telecom Services, and Materials sectors. (To read more, see: Bull Market Seen Ending in 2019 After Fiscal ‘Sugar Rush’.)

Amid this earnings slowdown, the bank expects stocks with the fastest revenue growth to outperform, and companies with strong balance sheets immune to rising interest rates will perform better than highly leveraged firms. Also, companies with lower labor costs will perform better as wages rise.