In the wake of the US midterm elections, Goldman Sachs' Lou Miller discussed the evolving market dynamics with Chris Hussey on The Markets. Miller highlighted a significant rotation in the market, with investors adopting a defensive stance. Beta-adjusted net exposure in Goldman's prime book remains low, reflecting cautious positioning.
The data center trade, particularly AI-related stocks, has faced a sharp downturn. Data center stocks are down 36% from their highs earlier this year, while sectors like memory and optical networking have seen even steeper declines of 42% and 46%, respectively. NeoCloud has dropped 57%. Miller noted that while the reaction was extreme, valuations have normalized, potentially setting the stage for positive catalysts.
Miller also emphasized the shift in the AI trade, pointing to healthcare as the next growth area. He described healthcare as a defensive sector with uncorrelated growth drivers, benefiting from both cyclical and secular trends. AI's impact spans various sectors, but healthcare stands out as a credible investment.
When discussing traditional defensives, Miller cautioned against expensive stocks, such as consumer staples, which offer low earnings and dividend yields compared to other assets. Instead, he recommended focusing on quality, free cash flow yield, and earnings yield in a higher nominal growth environment. Miller's preferred trade is the S&P 500 excluding AI, offering high-quality balance sheets and low teens earnings growth at a high teen multiple.
Looking ahead, Miller is watching key indicators like employment, inflation, geopolitical events, and earnings season. He also highlighted the importance of equity and debt capital markets, as well as the FOMC decision on December 9th. For the year-end, he anticipates a relaxed Santa Rally.