In this piece, we will take a look at the top stocks that are popular with mutual fund managers according to Goldman Sachs.
As the fourth quarter of 2024 starts, the market is once again back to debating about the Federal Reserve’s interest rate cuts. The latter half of September saw some much overdue optimism on Wall Street as the Federal Reserve kicked off its rate cut cycle through a 50 basis point cut. Since the day of the rate cut and the close of September, the flagship S&P and the broader NASDAQ index gained 2.6% and 3.5% respectively.
However, the start of October saw the return of nervousness that investors have been dealing with since the start of the rate hiking cycle and worries of a recession. The S&P and the NASDAQ dropped by 1.1% and 1.5% after labor market data saw the US market add 254,000 in nonfarm payrolls and 8.040 million overall jobs measured by the Labor Department’s JOLTS survey. Both of these releases beat economist expectations, leading to sharp drops in markets as investors now factored out a 50 basis point cut at the next meeting of the Federal Reserve.
The latest drops despite a strong labor market are indicative of how investors expect nothing but a perfectly balanced data set since in August, Magnificent 7 stocks, which are generally dependent on robust discretionary and corporate spending, lost $800 billion in market value after unemployment jumped by 4.3% in July for its highest value since September 2021.
However, even though markets pared back their gains in October, the fact still remains that drops due to a strong labor market are nevertheless better than ones that follow a slow market. This is because the former scenario promises a robust economic outlook. Soon after the fresh labor data that caused jitters in October, investment bank Goldman Sachs was out with yet another 2024 target for the benchmark S&P index. The bank now expects the S&P to close 2024 at 6,000 points, a sizeable bump over its first 2024 target of 4722 points, with the latest estimate being its fourth revision of the 2024 target so far. The first revision saw the bank bump up 2024’s S&P closing estimate to 5,100 points in late 2023, and two subsequent revisions saw further upside as it predicted that the index would close out at 5,200 and 5,600 points.
The latest revision now sees the bank estimate that the index will close at 6,000 points – for a 4.3% upside over the recent closing value of 5,751 points. It is based on the bank’s optimism about the third quarter earnings cycle, as the index revision was followed by an upward earnings revision as well. Heading into earnings, Goldman believes that in 2025, the S&P’s earnings per share will now sit at $268. This is a 4.7% upward revision from the bank’s previous estimate of $256 and it assumes that earnings will grow by 11.2% next year over the 2024 earnings estimate of $241. This isn’t the only growth estimate in the banks’ latest market outlook since the report also sees it introduce an S&P earnings target for 2026. As per Goldman, in 2026, the S&P will deliver earnings per share of $288 to mark a 7.4% annual growth and a stronger 19.5% growth over this year’s earnings.
For a market that first struggled with worries of a recession in August and is now re calibrating expectations for the interest rate cut cycle, it’s important to see what’s driving the bank’s optimism. Led by chief US equity strategist David Kostman, analysts have built their optimism on the back of strong economic performance. In the note, Kostin comments that his firm’s “forward EPS estimates reflect a steady macro outlook.” He adds that “the primary driver of the upward revision to our 2025 EPS estimate is greater margin expansion,” since the “macro backdrop remains conducive to modest margin expansion, with prices charged outpacing input cost growth.” This backdrop, as you might expect, is driven by bullish expectations about the US economy. As per Kostin, the 2025 EPS estimate is driven by Goldman’s assumption that “sales will grow by 5%, roughly in line with nominal GDP growth (vs 4% previously).”
Yet, despite the optimism, the analysts are also wary about short term turbulence in the stock market. October is the last month before a hotly contested US presidential election, and investors have also felt jitters from ongoing hostilities in the Middle East. Consequently, Kostin warns that as “everyone is in the pool” right now, with the election looming and the mutual fund fiscal year ending on October 31st, stocks could see some shifts as the big players rotate their positions. As an example of the volatility that the market is facing right now, the analyst points out that the Chicago Board’s CBOE volatility index jumped by 30% over the past five trading days to signal that “volatility is no longer the coach on the sidelines: it is the player on the field.”
Speaking of mutual funds, they’ve done quite well this year. We took a look at the brief performance of mutual funds as part of our coverage of Goldman Sachs’ Top Fund Manager Stock Picks: 25 Best Overweight Stocks. This revealed that as per BofA, during the first quarter, 64% of actively managed mutual funds beat their benchmarks during Q1, for their best set of performance over the past 17 years. This also marked a significant improvement over last year’s performance when 38% of these funds had beaten the benchmarks.
The Fed’s interest rate cut also means that hedge fund shifted their positions. Financial services firms and banks in particular benefit from interest rate cuts as their deposit costs drop and they can earn more by maintaining existing rates. Consequently, according to Goldman, in the week before the Fed interest rate cut, hedge funds bought banks and financial services stocks at the fastest pace since 2023. This falls in line with what UBS Wealth Management’s Brad Bernstein shared in his comments after the rate cut when he explained that lower rates make financials attractive since “the improving yield curve for their balance sheet and what that means for their ability to lend at higher rates and pay cheaper rates on cash savings.”
With these details in mind, let’s take a look at the stocks that mutual funds piled into in Q2 according to Goldman Sachs.
A financial trader sitting at a desk with an open laptop surrounded by data on the stock market.
Our Methodology
For our list of Goldman Sachs’ top stocks that are popular with mutual fund managers, we used the bank’s list of 20 Russel 1000 stocks that mutual fund managers had grown their positions in during Q2 2024. The stocks are ranked by the number of funds that increased their portfolio allocation versus those that had decreased it.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
20. CrowdStrike Holdings, Inc. (NASDAQ:CRWD)
Number of Mutual Funds: 16
Number of Hedge Fund Investors in Q2 2024: 69
CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a cybersecurity company that has been in the news in 2024 for all the wrong reasons. The firm’s faulty software update in July bricked roughly 8.5 million computers worldwide. The impact was widespread, with airlines and other businesses being unable to provide services to customers. Consequently, CrowdStrike Holdings, Inc. (NASDAQ:CRWD)’s hypothesis as now shifted to how the aftermath of the impact might affect its growth and whether it will experience customer churn. The outage led to CrowdStrike Holdings, Inc. (NASDAQ:CRWD)’s shares dipping by 42% in July, but the firm seems to be recovering as the stock is up by 33% since it bottomed out in early August. Additionally, investors are on the lookout for what the firm’s management believes is the current customer sentiment. On this front, an analyst note from TD Cowen released in October provided insights. After maintaining a Buy target and a $38 rating for the stock, analysts opined that “MSFT is unlikely to cut CRWD off from accessing telemetry data out of the kernel given the mission criticality of the Falcon EDR platform product (deployed at >29k customers, 70% of Fortune 100).” However, they cautioned that CrowdStrike Holdings, Inc. (NASDAQ:CRWD) needs at least two quarters to gain insight into customer contract renewals of the ill fated Falcon system, noting that “We understand that a more precise quantification of the revenue uplift potential requires two more quarters of patience before management obtains sufficient visibility into that pipeline.”
Baron Funds mentioned CrowdStrike Holdings, Inc. (NASDAQ:CRWD) in its Q2 2024 investor letter. Here is what the fund said:
“CrowdStrike Holdings, Inc. is a cloud-architected SaaS cybersecurity vendor offering endpoint security, threat intelligence, and cyberattack response services. Shares continued their strong performance from the first quarter and were again a top contributor, rising 19.5% in the second quarter on better execution than peers in the broader security space. The company reported strong quarterly results with 33% year-over-year revenue growth, driven by customers consolidating their cybersecurity spend on CrowdStrike with free cash flow margins reaching 35%. With accelerating market share gains in its core endpoint detection and response offering, emerging products including Cloud, Identity, and SIEM reaching material scale, and newer products in data protection and AI ramping quickly, net new annual recurring revenue and total revenue look to sustain a long duration of growth. With its leading competitive positioning in cybersecurity, the growing threat landscape (which is also driven by the advancements in AI, making hackers more dangerous), its unique lightweight, single-agent, architecture, and its platform approach, we retain conviction in CrowdStrike, which is emerging as the security platform to beat in terms of scale, profitability, and free cash flow conversion.”
19. Becton, Dickinson and Company (NYSE:BDX)
Number of Mutual Funds: 16
Number of Hedge Fund Investors in Q2 2024: 65
Becton, Dickinson and Company (NYSE:BDX) is one of the largest medical instruments companies in the world. The firm’s product portfolio covers a diverse set of products such as drug detectors, catheters, inventory optimization systems, and drug collection products. Its size and scale provide Becton, Dickinson and Company (NYSE:BDX) with considerable resources as evidenced by the firm’s trailing twelve month revenue of $19.8 billion and cash and equivalents of $1.4 billion. It also provides the firm with key economies of scale that are necessary to keep margins high. Yet, these economies also mean that Becton, Dickinson and Company (NYSE:BDX) has to maintain or grow its revenue otherwise its margins suffer due to high operating expenditure. The stock is down 3.4% year to date on the back of two key factors. One factor behind the weak sentiment is Becton, Dickinson and Company (NYSE:BDX)’s China revenue. As of its latest quarter, the firm’s international revenue was $2.1 billion, which accounted for 42% of its sales. A slowdown in China meant that international revenue remained flat, adding to woes as Becton, Dickinson and Company (NYSE:BDX)’s pharmaceutical and biomedical businesses have also failed to grow. As a result, for the nine months ending in June, the firm’s revenue has grown by a modest 3.2% while its expenses have jumped by 3.5%.
To mitigate some of its growth challenges, Becton, Dickinson and Company (NYSE:BDX) is focusing on acquisitions. Here’s what management shared on this front during the Q3 2024 earnings call:
“Today, BD has a $4 billion-plus business in health care automation and informatics AI and we’ll increase this to over $5 billion as we complete the acquisition of Critical Care. This expands BD in the smart critical care space and creates new opportunities to combine AI-driven monitoring with systems such as infusion technologies to simplify nursing workflow and improve patient care.
Looking ahead to 2030, we view health care process automation and informatics AI as having the potential to become a business exceeding $7 billion as we continue to build more connected, automated and intelligent solutions to transform the core processes underlying care delivery.”