Investors in U.S. stocks need to focus on balance-sheet strength and beware record-high net leverage, according to a report from Goldman Sachs Group Inc.
Stocks with weak balance sheets have outperformed those with strong ones since 2009, an "unusual" pattern as companies took advantage of the low cost of borrowing, Goldman wrote. But strong balance sheets have taken the lead since 2017 as rates march higher.
"Corporate managers should continue to deleverage," the Oct. 4 report from strategists led by Cole Hunter and David Kostin said. "Prudent investors have already started to reward stocks with strong balance sheets given near record net leverage, rising interest rates, and the belief by many investors that a recession will occur in 2020."
Returning cash to shareholders is a "winning long-term strategy" for boosting stock prices that fares best when growth in gross domestic product is strong like it is this year, the report said. Goldman expects companies that prioritize buybacks and dividends will continue to outperform firms investing for growth next year.
