US stocks have swiftly rebounded after a surprising drawdown that caught many investors off guard. The S&P 500, which experienced its worst day since September 2022 with a 3% plunge on Monday, has already shown signs of recovery. Top strategists at renowned firms such as Goldman Sachs and Morgan Stanley are offering investment advice on where to allocate funds during this period of market volatility.
Historical data suggests that the S&P 500 tends to bounce back strongly after a 5% pullback. In a note on August 5, David Kostin, the chief US equity strategist at Goldman Sachs, highlighted that the index typically follows a 5% decline with a mid-single-digit gain over the next three months, occurring in approximately 80% of such scenarios since 1980. While the track record becomes more uncertain after a 10% correction, the market has historically performed well in the next 12 months when the US economy avoids a recession, as is currently expected.
It is worth noting that major drawdowns, although uncomfortable, are not uncommon. According to Truist, the S&P 500 typically experiences a 14% peak-to-trough decline in a typical year. However, it has rebounded from its annual lows in 33 of the last 40 years, with an average recovery of 13%. This recent selloff should be less surprising following a vigorous multi-month rally, as highlighted by Truist investment chief Keith Lerner. Lerner expects US stocks to face challenges during the seasonally weak late-summer period but remains confident in their long-term prospects.
While investment firms agree that US stocks have upside potential, there are differing opinions on how to approach a potential rally. Goldman Sachs and Truist recommend defensive stocks in the communication services and utilities sectors. Kostin also advocates for consumer staples, noting that these economically agnostic groups tend to rise as slower economic growth encourages the Federal Reserve to cut interest rates, which is widely expected to happen next month.
Mike Wilson, the chief US equity strategist at Morgan Stanley, shares a similar cautious approach. He focuses on defensive stocks and large caps, as companies that can withstand any economic backdrop have shown relative strength compared to cyclicals amid a weakening labor market. Wilson’s research suggests that defensives and large caps tend to exhibit relative strength during rate cuts, contrary to conventional wisdom that favors economically sensitive companies and small caps. Wilson believes that fading inflation limits companies’ ability to pass on higher costs to consumers, potentially impacting small caps more due to their lack of scale compared to larger competitors.
On the other hand, UBS Global Wealth Management takes a more offensive stance, albeit cautiously, by seeking high-quality growth opportunities, particularly in leading artificial intelligence (AI) stocks. Solita Marcelli, UBS GWM’s chief investment officer, Americas, believes that the recent correction in AI stocks presents an opportunity to add exposure to semiconductor, software, and internet companies benefiting from AI advancements at more reasonable valuations.