Goldman Sachs: Profitability of heavy asset stocks expected to lead the rise, capital rotation entering a "protracted war"

Goldman Sachs strategists believe that capital-intensive companies are expected to deliver strong profits in this earnings season, further outperforming their light asset peers that rely more on manpower or digital assets. The team of Goldman strategists led by Guillaume Jaisson pointed out, "Investors are in a shortage of allocation in a world where physical assets, infrastructure, and industrial capacity regain strategic importance." The European capital-intensive sector basket (including utilities and energy) has accumulated a 15% increase year to date. Meanwhile, as investors become more skeptical of the high valuations in the artificial intelligence sector, the index tracking light asset stocks has fallen by 2%. Goldman strategists also stated that profit expectations are showing similar divergences - with the heavy asset group receiving the strongest upward profit revisions since the beginning of the year. Jaisson wrote in the report, "While the bar is high, the potential for earnings surprise is also significant. The next stage of performance does not require further valuation expansion or even large adjustments to expectations, just delivery." From a regional perspective, the European market is emerging as the biggest beneficiary of this rotation. Since investors have been favoring the rotation away from chip manufacturers, the European market has been lagging behind the U.S. market since March, but has recently regained its leading position. Since mid-March, the Euro Stoxx 600 index has outperformed the S&P 500 index by about 7 percentage points, leading global major stock indices with a 4.2% increase in the past month, while the U.S. stock market has only seen a 0.8% increase. EPFR data monitoring fund flows show that European stock funds have received a net inflow of over $12 billion in the past four weeks, while U.S. technology sector funds have seen a net outflow of nearly $9 billion. The decrease in oil prices has also boosted the outlook for sectors highly correlated with the economic cycle, alleviating cost pressures on euro area companies with high energy import dependence, and boosting profit prospects for cyclical industries such as aviation, logistics, and automotive. These sectors account for a much larger proportion in the European market compared to the tech-heavy U.S. market. Consequently, the impact of this rotation on the U.S. market has been more significant. Jaisson pointed out that "HALO" trades - those focused on "Heavy Assets, Low Obsolescence" - are now entering a "more sustainable stage," where profit drivers rather than broad valuation rises will be the main force in the market. He emphasized that even within the heavy asset sector, the differentiation between winners and losers will further widen. Jaisson stated, "We are not bearish on AI or light assets, but simply believe that current relative valuations and fund flows are overly extreme. The core logic of HALO trades is that in the process of reevaluating the market's scarcity of physical assets, the premium for profit certainty will continue to exist." Goldman's heavy asset basket includes stocks such as Infineon, Rolls-Royce, and Airbus, while the light asset basket includes Adidas, British American Tobacco, and Danone. Meanwhile, the Goldman Sachs strategy team also highlighted several key risks. First, if global economic growth significantly slows down, the high operating leverage of the heavy asset sector could amplify profit fluctuations. Second, if geopolitical tensions in the Middle East escalate again, oil prices may soar, suppressing the performance of European cyclical stocks. Third, if there are new technological breakthroughs or applications in the AI field, funds could quickly flow back into tech stocks, interrupting the current rotation rhythm. Barclays, Deutsche Bank, and other institutions' strategists have recently raised their year-end targets for European stocks. Barclays recently raised its year-end target for the Euro Stoxx 600 index from 620 to 670 points and ended its "underweight" rating on the region's stocks, citing lower oil prices and potential U.S.-Iran agreement may reduce eurozone stagflation risks and improve macroeconomic prospects. Deutsche Bank had previously set a year-end target of 650 points for the Euro Stoxx 600 index in 2026 and upgraded its rating on European stocks from neutral to overweight. The strategist team led by Maximilian Uleer expects major European indices to rise by 12% to 16% in 2026, driven by double-digit profit growth and still relatively low valuations. On June 29th, J.P. Morgan analyst Mislav Matejka raised the year-end target for the Euro Stoxx 600 index from 630 to 680 points, implying about a 7% upside potential.