We recently made a list of Goldman Sachs’ List Of Stocks Popular With Mutual Fund Managers: Top 20 Stocks. In this piece, we will look at where ranks among the list of stocks that mutual funds are buying 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.”
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).
An investor confidently checking stock market fluctuations on a laptop computer.
Carvana Co. (NYSE:CVNA)
Number of Mutual Funds: 22
Number of Hedge Fund Investors in Q2 2024: 61
Carvana Co. (NYSE:CVNA) is an internet based used car retailer that enables customers to buy and inspect cars online and then pick them up from its iconic vending machines. Since it is both a traditional company and a new age firm, Carvana Co. (NYSE:CVNA)’s hypothesis is driven by a combination of factors. For starters, the firm has to keep a close eye on its inventory and ensure that it buys only when prices are low and doesn’t sell at the wrong time. Additionally, as Carvana Co. (NYSE:CVNA) is an internet based firm, its margins see greater interest from investors as a lack of a traditional business model enables the firm to unlock lower costs. With used car prices in the US being in constant flux and falling due to a slow automotive industry making new car inventory build up, Carvana Co. (NYSE:CVNA) could see tailwinds in the future if prices stabilize following inventory correction. Lower rates help car sales, and as economic worries have started to dissipate, Carvana Co. (NYSE:CVNA)’s shares have risen by gaining 38% between September and October. However, a weakening credit environment could spell trouble, particularly as Carvana Co. (NYSE:CVNA)’s partner Ally Financial struggles with auto credit. Ally holds receivables from the car retailer and friction between them could reduce Carvana Co. (NYSE:CVNA)’s market impact.
Carvana Co. (NYSE:CVNA)’s management commented on the credit environment during the Q2 2024 earnings call:
“Sure. I think from a demographics perspective, I think, clearly, affordability was impacted pretty heavily over the last couple of years. I think there’s good news there, though. We have seen kind of higher levels of depreciation over the last 1.5 years. I think relative to CPI, car prices are now only probably about 3% higher than they were pre-pandemic. So I think we’ve closed a lot of that gap. Rates are obviously higher. So if you look at payments, payments are still about 10% higher than they were pre-pandemic for a similar car. So there’s probably a little bit of room for that to continue to improve. And that, of course, is impacting the lower end of the demographic spectrum probably more than the higher income end.
But I don’t think there’s anything too notable to call out there. I think we’re just focused on continuing to buy the cars that our customers are demanding on our site, getting those up, getting those reconditioned, delivering them to customers and giving them great experiences. And I think that’s what’s driving our success right now without too much focus on one group or another. From a credit perspective, I think credit clearly was kind of slowly moving back toward pre-pandemic normal after being very good in ’20 and ’21, and then probably crossover was a little bit worse in ’22 and parts of ’23. And I think many lenders ourselves included, started to tighten credit in the fourth quarter of ’23. What we’ve seen so far from that is performance that’s definitely in line with what we would have hoped to see.”
Overall CVNA ranks 7th on our list of the stocks popular with mutual fund managers according to Goldman Sachs. While we acknowledge the potential of CVNA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CVNA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey. All investment decisions should be made after consulting a qualified professional.
