A COVID-19 vaccine would challenge tech leadership and spark a rotation into value, Goldman Sachs says

• The successful development of a COVID-19 vaccine would drive the stock market higher, but expect beaten-down value stocks to lead the rally rather than tech stocks, according to Goldman Sachs.
• In a note published on Wednesday, Goldman said stocks are "setting up for a shift in leadership across markets," with a vaccine likely sparking a rotation from growth into value, similar to the rotation that started in May and ended in early June.
• Other sharp rotations that can occur in the event that a COVID-19 vaccine is developed include international stocks outperforming US stocks, and interest rates reversing their downward trend and moving higher.
• The firm said its upside scenario in the event that a vaccine is developed is for the S&P 500 to jump to 3,700, representing potential upside of 11% from current levels.
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The stock market is "setting up for a shift in leadership" in the event that a successful COVID-19 vaccine is developed, according to Goldman Sachs.

In a note published on Wednesday, Goldman said it expects the S&P 500 to jump 11% from current levels to 3,700 if a vaccine is proven successful, as "equity upside looks cheap."

But don't expect that grind higher to be led by technology and growth stocks as it has been since the work-from-home trend was electrified by the pandemic outbreak.

Instead, according to Goldman, expect a sharp rotation from growth into value, US stocks into international stocks, and interest rates to move higher.

For now, with school reopenings across the country presenting a significant risk of more COVID-19 outbreaks, the trends of low real interest rates, tech leadership, and US stocks' outperformance of international stocks should continue, Goldman said.

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But, with those trends "getting stretched," investors should prepare for the possibility of a massive "shift in leadership" in the months ahead, "especially if news flow on the vaccine front continues to be encouraging," according to Goldman.

A vaccine would "challenge tech leadership" and prompt a rotation that started in May and ended in early June, "supporting traditional cyclicals, steeper curves and banks," the note said.

And even though a vaccine could provide "faster benefits to the US economy," European and emerging market stocks would be favored, as risk perceptions in economies where controlling the spread of the virus has proved challenging would be reduced, explained Goldman.

Additionally, a Joe Biden win in the upcoming November election could help boost emerging market stocks if risks surrounding trade policy lessen, and could at the same time hurt US stocks as a hike in taxes would become more likely, Goldman concluded.

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