GOLDMAN SACHS: A recent shift is suddenly creating a new set winners in the stock market, and the gains are just getting started

Carlos Barria /Reuters

• Since late last year, the US dollar has weakened on widespread concern about economic growth.
• This development has boosted a group of stocks that Goldman Sachs had recommended to clients for this very scenario.
• In a note on Monday, Goldman's equity strategists laid out why these stocks can continue rallying and the risks attached to their outperformance.

As US stocks tanked late last year, the currency market was sending warning signs of its own about future financial conditions.

The trade-weighted dollar has fallen more than 2% since November 2018. Foreign-exchange traders, like their counterparts in equities, were becoming more concerned about a slowdown in US economic growth this year and a possible recession thereafter.

Corporate news out early on Monday - the start of a busy earnings week - didn't help matters as Caterpillar and Nvidia warned about slowing global growth.

Though dollar bulls are counting losses, the currency's decline has in fact boosted a group of US stocks that are vulnerable to its gyrations. A weaker dollar makes American products more appealing to buyers with other currencies, and shares of internationally exposed companies have followed suit by rallying.

Goldman Sachs found that this development has given multinationals a leg up over their domestically oriented peers. The firm's basket of stocks with the largest share of international revenues has outperformed the group of companies with the most domestic revenues by 144 basis points during the past two months.

Goldman Sachs

It's a trend that could continue if Goldman's forecasts for economic growth and the dollar turn about to be correct. Economists expect gross domestic product growth in the US to slow to a 2.4% pace on average for the year, versus 2.9% in 2018. They see growth slowing to 3.5% to 3.8% globally.

In August, Goldman's equity strategists predicted that a reversal of the dollar's rise would boost internationally dependent stocks - a call that's played out over the past two months. Goldman's FX forecast still calls for more dollar weakness, meaning that more gains could be earned from this basket.

However, the forecast for more dollar weakening is a double-edged sword, Goldman warned. So far, the weak-dollar narrative for stocks is one of foreign buyers finding US products more appealing. But if global growth significantly slows down and hurts consumers around the world, multinationals won't be spared.

Get the latest Goldman Sachs stock price here.