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Goldman Sachs turns bullish on industrials, utilities

Yahoo Finance's Brian Sozzi, Alexis Christoforous, and Jared Blikre discuss the industrials and utilities industries.

Video Transcript

BRIAN SOZZI: With the markets back at record highs, Goldman Sachs says it may be time to re-balance your portfolio. Take a look at some of those neglected industrial and utility names. Jared Blikre is back here with details.

Jared, surprising call somewhat by Goldman Sachs. But they're the first investment bank to put some credence behind the rotation we have seen into industrials the past few weeks.

JARED BLIKRE: Yeah, they do like industrials, as well as utilities, for different reasons here. And as the COVID vaccine comes ever nearer-- and that's one of the big factors they say is influencing their decision here. As that becomes clearer, they expect those sectors to outperform.

Everybody knows this story in tech. But industrials, as you said, pretty interesting. They're saying that it should benefit from improving global economic growth and potential infrastructure spending.

And then the utilities, that's really an interest rate play. We've seen such low rates, not only on the short end but the long end. They're saying that the dividend yield level relative to the level of interest rates is near a 25-year high.

But for the underweights, they don't like health care as much, real estate, energy, and materials, for different reasons. And they do suggest index weighting financials, communications services, consumer discretionary, and consumer staples.

ALEXIS CHRISTOFOROUS: And Jared, I see they're underweight health care and real estate. Real estate, I guess, I can see. But why health care?

JARED BLIKRE: Well, there's a lot of policy uncertainty going into the elections. It's kind of a talking point going back several years for both the Republicans and the Democrats, attacking drug pricing. So we've seen biotech and health care fall off over the last week, and probably a part of this call here.

As to materials, they have weaker balance sheets. And we've also seen them benefit from a much weaker dollar. We'll have to see if that continues.

And then for energy stocks, it's again, the balance sheets. And also, them expecting-- this is Goldman expecting range-bound crude oil prices through the end of the year.

BRIAN SOZZI: Jared, talk about interesting timing with this call from Goldman. It comes at a time when those hot work-from-home trades have started to weaken. Just pull up, if you could, AMD and Zoom. Those stocks have definitely cooled off.

JARED BLIKRE: Yeah, they have. We saw AMD at record highs, I believe as recently as last week. Zoom has been that go-to work-from-home trade.

So as we've seen this nascent rally, this kind of little leg over the last 10 days, we've seen some of these sectors outperforming. It's a game of catch-up here. So you've got to pick the winners and losers. And value the value cyclical play covers a lot of sectors.

Goldman specifically says they like, besides tech, industrials and also utilities the most. But again, that utilities play, and also kind of staying away from the financials is predicated on lower interest rates.

So we've seen this huge expansion in the yield curve over the last, say, week or so, and a big rise in the 10-year. If that were to continue, that would weigh on Goldman's recommendations.

BRIAN SOZZI: All right. Good stuff there, Jared.