- Goldman Sachs's Lou Miller said he believes the rotation trade is only "halfway through" in a new Daily Check-In podcast.
- Miller highlighted the energy, materials, financials, industrials, and consumer discretionary sectors as top performers.
- He also talked about the effects of inflation and said investors might look to Europe and emerging markets for their "reopening trade" moving forward.
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The rotation trade is only halfway through, and the industrial, financial, energy, consumer discretionary, and materials sectors will continue to outperform until it's over, according to Goldman Sachs.
"I think we're definitely halfway through this trade, but I don't think we're close to the end. I think there's still room for this rotation to continue," Miller said.
The rotation trade is an ongoing move by investors away from highly-valued growth and tech-related stocks to more value-oriented names.
The reasoning behind the trade involves rising growth and inflation expectations – thanks to vaccines and stimulus – which may lead the Fed to increase interest rates and pull back on asset purchases.
That puts pressure on growth stocks which are valued based on discounted future earnings. When the discount rate changes due to increased interest rate expectations, tech and growth stock valuations are called into question.
A new study released by E*Trade on May 3 illustrates the prevalence of the ongoing rotation away from high-flying tech and growth stocks, even by retail investors.
The top three sectors retail investors entered in April were energy, industrials, and communication services.
Miller highlighted a similar basket of sectors for investors to consider in his recent Daily Check-In podcast
Miller said that the industrial, financial, energy, consumer discretionary, and materials sectors are all set for a strong performance while the rotation trade remains in play.
The VP highlighted the fact that the energy, materials, and industrials sectors make up just 14% of the S&P 500 while tech shares account for double that figure. That also doesn't take into account that Amazon, Tesla, Facebook, and Google aren't classified as tech stocks.
Miller said that the low market cap illustrates there is room to run in these sectors even after multiple months of the rotation trade.
When asked which sectors investors have been rotating into and should outperform moving forward, Miller said:
"It's clearly these commodity-sensitive areas of the market like energy and materials, these real economy areas such as industrials, and the reopening sector such as consumer discretionary and then lastly financials. Financials is one of those sectors that is classically considered value."
Miller also highlighted the growing effects of inflation on a basket of stocks and said his team is looking for "winners and losers there."
Looking forward, Miller said investors should consider the reopening trade for Europe and emerging markets and be aware of the effects of Biden's infrastructure spending and tax increases on American equities.