(Bloomberg) — US midcap stocks are attractive at the moment given their relatively cheaper valuations compared with larger companies, according to Goldman Sachs Group Inc.
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“They trade at much lower multiples than the rest of the market” and have similar growth rates, David Kostin, Goldman’s chief US equity strategist, said in a Bloomberg Television interview. “That’s a much better risk-reward in my opinion.”
Kostin’s optimism on smaller stocks points toward increasing expectations that the US equity rally will broaden further beyond the Magnificent Seven megacap tech equities, which include iPhone maker Apple Inc. and chip bellwether Nvidia Inc. and have helped power the S&P 500’s rally in recent years.
Kostin sees room for a catch-up trade. The S&P Midcap 400 Index has underperformed the S&P 500 in seven of the past eight years. The midcap gauge trades around 16.4 times its one-year forward earnings estimate, compared to 21.5 times for the S&P 500.
The strategist prefers owning domestic-oriented companies in the US and paring those with bigger international exposure — like the Magnificent Seven — as Donald Trump officially takes office as US President.
He added that the swift upward move in Treasury yields over the last month is a concern, but says inflation is still coming down, if slowly, and yields will fall over time.
Kostin reiterated his call that the S&P 500 benchmark will rise to 6,500 by the end of this year, implying an 11% gain from Tuesday’s close. That’s slightly below the median forecast of 6,600 among strategists tracked by Bloomberg. He expects the advance to be led by earnings growth.
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