Goldman sees potential rotation to low-profit stocks if jobs gain

A solid US jobs report at the end of the week could spur a rotation from the market’s most profitable names into stocks with weaker earnings, according to Goldman Sachs Group Inc. strategists.

A strong Labor Department jobs print on Friday could prompt some investors to “price lower odds of substantial labor market weakening,” leading them to “rotate out of expensive ‘quality’ stocks into less-loved lower quality firms,” the team led by David Kostin wrote.

US equities have returned to record highs as investors bet the economy can avoid a recession, supported by looser monetary policy. The nonfarm payrolls report is the main focus for markets this week, and is expected to show a healthy, yet moderating, labor market.

Bloomberg’s factors-to-watch analysis shows that a so-called quality strategy, that sees investors target the most profitable equity names, has been among the top five best-performers in the US this year. 

Morgan Stanley’s Michael Wilson also flagged recently that the labor market will be a bigger driver of stocks than the outlook for interest rates. In a note on Sunday, the strategist reiterated his preference for large-cap stocks and higher-quality sectors.