Goldman Sachs recommends 3 ways to trade the U.S.- China trade war

Scott Gamm

Goldman Sachs strategists have a few ideas to protect your portfolio, as the trade war with China reaches fever pitch.

Trade tensions and rhetoric have contributed to a volatile month of trading, with the S&P 500 (^GSPC) down roughly 5% from its July 26 closing record high of 3,026.

“Our year-end S&P 500 price target of 3,100 represents a 9% return from the current level,” wrote Goldman Sachs analysts, led by chief U.S. equity strategist David Kostin, in a note to clients. “However, U.S.-China trade represents a significant source of uncertainty to our projection; a downside scenario could see the S&P 500 end 2019 at roughly 2620, or 8% below the current level.”

US-China trade war (Getty Creative)

Services-providing companies

There is a certain mosaic of stocks to focus on amid the trade war with China, according to Goldman Sachs.

“The U.S.-China trade dispute has weighed more on the fundamentals and share price performance of Goods-producing companies compared with Services-providing firms,” the analysts wrote. “Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-U.S. sales exposure than Goods firms.”

Some of the largest services stocks Goldman points to include names like Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Berkshire Hathaway (BRK.B), among others.

Stocks with U.S. focused revenue streams

Since the trade war is a global issue, companies that derive more sales domestically should suffer less than their multi-national counterparts, Goldman said.

“Tariffs pose a limited direct risk to S&P 500 revenues, given that the S&P 500 in aggregate generates 70% of its sales domestically and just 2% explicitly from Greater China,” the analysts wrote. “However, within the S&P 500, stocks that generate the highest share of sales within the U.S. should be relatively insulated from tariffs compared with stocks that have high sales outside the U.S. and to China in particular.”

Examples of U.S. sales-centric stocks that Goldman points to include names like Yahoo Finance parent company Verizon (VZ), Target (TGT), Wells Fargo (WFC) and Marathon Petroleum (MPC), among others.

Dividend stocks

Trade tensions have contributed to the decline in the 10-year Treasury yield (^TNX), which stood at roughly 2% in late July, before plunging to 1.5% currently.

Goldman sees opportunities in dividend stocks, especially with this latest move lower in the 10-year yield.

“We forecast S&P 500 annualized dividend growth of 3.5% during the next decade and believe that the swap market pricing of 1.4% growth is overly pessimistic,” the analysts wrote. “Stocks across S&P 500 sectors with the highest dividend yields reflect this pessimism and currently trade at their largest valuation discount in nearly 40 years.”

Some of the constituents in Goldman’s dividend growth basket include names like AT&T (T), Kohl’s (KSS), and Delta Air Lines (DAL), among others.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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