The US Midterms: Reshaping the Stock Market

0:04This is The Markets. I'm Chris Hussey. And today is Thursday, November 5th. And we're here on the Goldman Sachs trading floor with Lou Miller, who is our global head of our custom baskets business within FIC and Equities. And on the back of the midterm elections, we're going to explore the market reaction and where we go from here. Lou, thanks so much for joining us. Thanks for having me. Let's start with the rotation trade that you can see from your baskets group. In particular, there was a rotation already happening before the midterms. How is that evolving post-midterms? Where do you think it heads into the year end?

0:40Yeah, so we've seen, especially in the second half of the year, it's been a really challenging environment for active investors. And we've seen people get very defensive. If you look at beta adjusted net exposure in our prime book, it's definitely at very low levels versus history. Let me peel back the onion a little bit on the rotation. Let's talk about data centers if we can. How is that data center trade holding up in the post-election world? Worse than I would have thought. I think it's bigger picture concerns like ROI, open source competition, limits on capital markets came in the picture the last few months.

1:16The AI data center trade, the right tail of that trade, has increasingly gotten removed and multiples have dramatically dropped to much healthier levels. We now see data center stocks down 36 percent from their highs earlier this year. And then some of the higher beta areas like memory down 42 percent, optical networking down 46, even neoclouds down 57. So the early reaction was way more extreme than I would have expected. But I think the silver lining is the bar is much, much lower for surprises, and there are positive catalysts ahead. Think about this. The multiple for the data center trade is about half of what it was in June.

1:59We're at Liberation Day lows in terms of multiples. So you can't argue valuation is a headwind anymore, and there are some positive catalysts ahead. Okay. I want to dive now into a little bit of the comment you made about defensives. And I want to go back to the post-pandemic era where tech became the new defensives. Let's explore the AI trade more broadly. You talked about a rotation. You talked about the data center trade. What about the AI trade more broadly? Is that a new defensive kind of trade or is that really evolving? I think the next leg of the AI trade is actually health care. And I think that's also a very defensive sector that historically is very uncorrelated to AI.

2:38Healthcare, we noticed those companies are getting very involved at the tools and diagnostics level. And that there's now, we're going from headwinds to tailwinds there. There's both cyclical and secular drivers there. And it's really one of the few sectors that we're going to see accelerating growth next year. So AI touches a lot of different parts of the economy, a lot of different parts of the market. everything from the application layer like cybersecurity. But I think healthcare is an area that increasingly looks more and more credible. All right. If the new defensive aren't the new defensive, what is the new defensive?

3:17What do you want to play defense? So yeah, so expensive defensives, I don't think are defensive. Oh my God, expensive defensives. In a slowing growth environment, not just for the AI CapEx complex, but the real economy, it does make sense to be defensive, but you don't want to take it too far. You don't want to bear your head in the sand. So you take staples, for example, the earnings yield of staples is half of the high yield bond yield. The dividend yield of staples is half of the 10-year treasury yield. To me, that's not a good deal for investors. I think people should look beyond the traditional defensive label and look for other characteristics like quality or free cash flow yield or earnings yield and this higher nominal growth backdrop.

3:57I think those dynamics are going to be a lot more defensive than a traditional defensive like Staples. All right, great. So we've walked through it. We've walked through the AI trade, the data center trade, the expensive defensives. Let's put a bow on it. What's the trade? I think the S &P 500, excluding AI, is the trade. So rather than pay 25 times earnings for some boring consumer product, you can pay a high teens multiple for low teens earnings growth. These are some of the highest quality balance sheets in the market. You're buying quality compounders in a decelerating growth environment. That seems like a safe play here over the next six months.

4:39I'm just curious, if you buy the S &P XAI, how many stocks is that? Well, you can get about 500. Just got to add a few extra. I like that. I love that. All right. As we go deeper into the end of the year, What are you watching for? Employment, inflation, the geopolitical events that have passed and then and then the rest of earnings season. Those are key. And then longer term, I'm watching the equity capital markets quite closely, debt capital markets closely. And then the FOMC decision on December 9th. I know it's early yet, but I've already gotten some hallmark ads in front of me. Santa rally or no Santa rally this year?

5:16I think a relaxed Santa rally. Yes. Oh, a relaxed Santa. I like myself a relaxed Santa. Lou, thanks so much for joining us. Thanks for having me. That does it for this week's episode of The Markets. I'm Chris Hussey. Thanks for listening.

5:49Lou Miller: from any Goldman Sachs entity to take any particular action, or an offer or solicitation to purchase or sell any securities or financial products. This material may contain forward-looking statements. Past performance is not indicative of future results. Neither Goldman Sachs nor any of its affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of the statements or information contained herein, and disclaim any liability whatsoever for reliance on such information for any purpose. Each name of a third-party organization mentioned is the property of the company to which it relates, is used here strictly for informational and identification purposes only and is not used to imply any ownership or license rights between any such company and Goldman Sachs.

6:25Lou Miller: A transcript is provided for convenience and may differ from the original video or audio content. Goldman Sachs is not responsible for any errors in the transcript. This material should not be copied, distributed, published, or reproduced in whole or in part or disclosed by any recipient to any other person without the express written consent of Goldman Sachs. Copyright 2026 Goldman Sachs. All rights reserved.