MW Goldman Sachs says a dash for trash could develop - if the U.S. economy continues to thrive
By Jules Rimmer
The time for trashy stocks may be approaching, says Goldman Sachs.
Investors would do well to prepare fora shift in market leadership toward companies in dire financial shape if the economy proves to be more resilient than anticipated, according to a new report from Goldman Sachs.
While seeing no evidence of a major rotation into the unloved and out of favor yet, Goldman warns that elevated valuations for mega-cap market darlings may create an asymmetric return profile for the S&P 500 in favor of a basket of stocks, perceived as lesser quality or trashy.
Although the S&P 500 SPX is within spitting distance of its all time high, the same cannot be said of most constituents. Performance is still heavily skewed toward the dominant themes of AI and large-cap so that while the index itself is up 8% in 2025 and around record levels, the median stock is 12% shy of its peak and has returned just 3%.
Divergence in YTD returns among various slices of the US equity market equal-weighted sectors;.
In the piece, David Kostin and his team explained why they think investors will continue leaning into this trend for now, but that a shift may come if the economic and earnings growth outlooks are more resilient than expected. If it does, investors should refocus on less fashionable stocks and sectors. Goldman highlights a selection of these, as well as those with idiosyncratic drivers (unique to that particular company).
Stocks with weak balance sheets, low returns on capital, high volatility, and low margins Ticker Name YTD Return (%) NTM P/E Net Margin (%) PSKY Paramount Skydance 13 9 0 CZR Caesars Entertainment -28 -2 CRL Charles River Laboratories Intl -19 14 -2 LKQ LKQ Corp. -18 9 5 HSIC Henry Schein Inc. -5 13 3 ALB Albemarle Corp. -18 -22 DAY Dayforce Inc. -27 20 3 DVA DaVita Inc. -15 11 6 CPB Campbell's Co. -19 12 4 MOS Mosaic Co. 31 10 8 RVTY Revvity Inc. -22 17 10 MRNA Moderna Inc. -36 -94 HII Huntington Ingalls Industries 43 17 5 SWK Stanley Black & Decker -12 13 3 NCLH Norwegian Cruise Line Hldgs -5 11 8 BAX Baxter Intl -18 9 -2 CNC Centene Corp. -58 9 1 BLDR Builders FirstSource -8 20 5 DOW Dow Inc. -44 -2 ZBRA Zebra Technologies -18 19 11 LYB LyondellBasell Industries -30 13 0 LUV Southwest Airlines -11 17 1 EL Estee Lauder Companies 23 40 -6 SW Smurfit Westrock -17 14 1 IP International Paper -9 18 0 DG Dollar General 56 19 3 ADM Archer-Daniels-Midland 17 13 1 UAL United Airlines Holdings -9 8 6 WBD Warner Bros. Discovery 12 2 IQV IQVIA Holdings Inc. -9 14 8 GM General Motors 0 6 4 FDX FedEx Corp. -19 12 5 GLW Corning Inc. 38 24 6 CARR Carrier Global -2 20 7 ELV Elevance Health -22 9 3 CI Cigna Group -1 9 2 MDLZ Mondelez Intl 6 19 10 INTC Intel Corp. -1 42 -39 GEV GE Vernova Inc. 97 62 3 List Median -9 13 3 S&P 500 median 4 19 10 Source: FactSet/Goldman Sachs
The potency of the AI investment case, the emphasis on cyclicals versus defensives and the pronounced slant towards large-cap has pushed relative valuations to extreme levels. The top fifth of what Goldman refers to as "quality" stocks in the S&P 500 is valued at a 57% premium on a price-to-earnings multiple to the "lower quality."
The bias towards these characteristics at present means the S&P 500 three-month returns dispersion, a measure of how widely distributed returns are between individual stocks, is in the 82nd percentile for the last three decades.
In this report, however, these valuation and performance extremes don't necessarily portend a sudden reversal. The Goldman team notes that "extreme factor valuations have not been consistent signals for near-term forward returns." In fact, valuations only explain an average of 10% of the variation in returns since 1980.
The research note, though, does go on to elaborate that extreme valuations can be a more useful indicator regarding the asymmetry of the distribution of forward returns. Since 1980 quality stocks outperformed by more than 10% over a twelve-month period only 14% of the time, although that percentage rises when the premium is not as high as it is now, for example.
Simply put, the 57% premium at present suggests the asymmetry of expected forward returns is skewed to the downside. The magnitude of "quality" outperformance is likely to be constrained.
If U.S. economic strength surprises to the upside, Goldman would expect more stocks in the Russell 2000 RUT with weaker balance sheets, higher volatility and lower margins to perform as well as those stocks with unique share-price drivers.
-Jules Rimmer
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August 11, 2025 06:38 ET (10:38 GMT)
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