A solid September jobs report could spur flight from ‘quality’ stocks – Goldman Sachs
Goldman Sachs' John Flood suggests that a strong September jobs report could lead investors to shift away from high-quality stocks to lower-quality firms. The report, due Friday, is crucial for the Federal Reserve's monetary policy decisions following a recent rate cut. Flood notes that the energy sector is under scrutiny due to significant short selling. He anticipates that the current high premiums for quality stocks may decrease as the macroeconomic environment remains stable. Key metrics include expected payroll growth of +144K and an unemployment rate of 4.2%.
An upcoming U.S. jobs report that shows solid conditions in the labor market may spark a pullback from so-called quality stocks, Goldman Sachs’ John Flood said.
The September jobs report is due Friday, with investors keying into the report as the Federal Reserve decides its next move on monetary policy after this month’s large rate cut of 50 basis points.
“A positive jobs print this Friday could prompt some investors to rotate out of expensive ‘quality’ stocks into less-loved lower quality firms as the market would likely price lower odds of substantial labor market weakening,” Flood, the head of Goldman Sachs' Americas equities sales trading in global banking & markets, said in a note Sunday.
He said he is watching for squeeze risk in Energy stocks considering that group of just underwent the most short selling in a single week in five years, according to Goldman Sachs’ data.
Flood said GS' portfolio strategy research team has assessed how a widening gap in return on equity across S&P 500 (SP500) stocks helps explain historically high premiums for quality factors.
“However, we expect these premiums will diminish as the macro backdrop remains solid,” Flood said. Sector-wise, Consumer Staples ROE has risen the most in 2024, at +224 basis points, while Energy ROE has contracted the most, -241 bp.
Earnings before interest and taxes margins were the primary driver of ROE changes, Goldman Sachs said, with Flood’s note showing this chart:
Federal Reserve Chair Jerome Powell said Monday while the labor market has cooled over the past year, it remains stable. Economists are widely looking for September payrolls growth of +144K, and for the unemployment rate to hold at 4.2%.
Here are some quality-factor ETFs investors can monitor: (SPHQ), (JQUA), (QUAL), (FQAL) and (QGRO).