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Kostin added that, in addition to the changing climate, the valuations of companies on the balance sheet are tense. The group, measured by a basket of shares, trades at 24 times the term profits, against 14 times only for companies with weak balance sheet. This kind of badessment was last seen during the tech bubble of the turn of the century.
Goldman does not recommend investors to fully bail out low-leverage companies – Kostin said they still deserve an allocation as a "minimum risk" hedge as earnings growth slows and companies continued to provide sustained growth, albeit more slowly.
CBS, General Motors and Allergan are among the largest companies listed in the most fragile balance sheet.
"The Fed's policy outlook, the pace of economic growth and earnings, as well as relative valuation, are the main factors in our view of strong balance sheet values versus weak stocks," said Kostin. "Changes in these variables could lead us to re-engage with strong balance sheets or to recommend rather than weak balance sheets."
The emergence of high beta stocks and lower quality has been a boon for stock breeders.
In January, a strong month for equities, 49% of large cap active managers outperformed their benchmarks, according to Bank of America Merrill Lynch. This is ahead of the 43% that dominated the market in 2018.
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