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(Bloomberg) — Capital-intensive companies are likely to report solid earnings this season, further outperforming peers that are more reliant on human or digital assets, according to Goldman Sachs Group Inc. strategists.
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“Investors remain under-positioned for a world in which physical assets, infrastructure and industrial capacity regain strategic importance,” wrote the team including Guillaume Jaisson.
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A basket of European capital-intensive sectors, which includes utilities and energy, has rallied 15% this year. On the other hand, an index tracking capital-light stocks has declined 2% as investors question high artificial-intelligence valuations.
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The Goldman strategists said earnings estimates reflect a similar divergence, with the capital-heavy group enjoying the strongest profit upgrades so far this year.
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“The bar is high, but so is the potential for higher earnings,” Jaisson wrote in a note. “The next leg of performance does not require further multiple expansion, or even significant upgrades. It simply requires delivery.”
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After trailing US stocks since March, European shares have taken the lead in the past month as investors embrace a rotation trade away from chipmakers. Falling oil prices have also brightened the outlook for economy-linked sectors, which are more prevalent in Europe compared with the tech-heavy US market.
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Strategists at banks including Barclays Plc and Deutsche Bank AG have recently raised year-end targets for European stocks.
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Goldman’s Jaisson said the so-called “HALO” trade — an acronym for Heavy Assets, Low Obsolescence — was now entering a “more durable phase” where earnings rather than a broad increase in valuations are likely to drive performance. That’s likely to create a wider dispersion between winner and losers even within the capital-heavy cohort, he said.
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The bank’s capital-intensive basket includes stocks such as Infineon Technologies AG, Rolls-Royce Holdings Plc and Airbus SE. The capital-light basket has Adidas AG, British American Tobacco Plc and Danone SA among others.
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