• The U.S. raised the tariff rate on $200 billion of imports from China from 10% to 25% on Friday, elevating trade tensions after a period of relative calm in 2019. Trade tensions played an important role in the sharp drop in equity markets in late 2018; markets are again showing concern.
• The consensus expectation seems to be that the U.S. and China will eventually strike a deal later this year. In the meantime, company characteristics which often go unnoticed may have a material impact on performance.
• Dividing the companies in the S&P 500 Index into portfolios of Goods-producing or Services-providing, we find that the ebb and flow of US-China trade negotiations during the past 12 months have had a dramatic impact on the performance of Goods companies compared to Services.
• The overlap between the Services/Goods distinction and other distinctions (e.g., Domestic/International revenue) may obscure the underlying thematic performance. As a result, investors may need to get comfortable with multiple cross-currents and less well-defined explanations for equity portfolio performance.
• As always, a well-diversified portfolio of asset classes and strategies is most likely to provide investors the smoothest ride and help them to achieve their long-term financial objectives.

The U.S. raised the tariff rate on $200 billion of imports from China from 10% to 25% on Friday, elevating trade tensions after a period of relative calm in 2019. Trade tensions played an important role in the sharp drop in equity markets in late 2018; markets are again showing concern.

The consensus expectation seems to be that the U.S. and China will eventually strike a deal later this year. In the meantime, company characteristics which often go unnoticed may have a material impact on performance.

For example, consider companies in the S&P 500 Index divided into baskets of Goods-producing and Services-providing firms. For context, the Services sector now represents 56% of S&P 500 equity capitalization, a substantial increase from a 30% share at the start of 1980.¹ Sector and industry tilts within the groups are pronounced. Services is dominated by the Software & Services and Media & Entertainment industry groups, while Goods is dominated by Pharmaceuticals, Biotechnology, & Life Sciences, followed by Capital Goods. Services-providing Financials and largely goods-producing Health Care are the most disproportionately divided sectors.

The ebb and flow of US-China trade negotiations during the past 12 months have had a dramatic impact on the performance of Goods companies compared to Services.

Source: Goldman Sachs Global Investment Research.

There is substantial overlap between the Services/Goods baskets and baskets defined according to the domestic or international nature of the company’s revenue and whether the economic sector is considered cyclical or defensive. Services has a large constituent overlap with companies in Domestic sectors, while Goods is overwhelmingly international. As a result, investors may need to get comfortable with multiple cross-currents and less well-defined explanations for portfolio performance.

As of May 6, 2019. Source: US Bureau of Labor Statistics, Goldman Sachs Global Investment Research.

The road ahead for investors may be filled with twists and turns that will be difficult to anticipate, but investors should take comfort that, in the long term, stock markets go up as earnings grow. While downturns will happen, they are generally short-lived compared to the longevity of periods during which stock market values are climbing. Given the uncertainty of the path ahead, a well-diversified portfolio of asset classes and strategies is the most likely to provide investors the smoothest ride and help them to achieve their long-term financial objectives.

The S&P 500 is a cap-weighted index that is generally considered representative of the U.S. equity market, consisting of 500 leading companies in leading industries of the U.S. Market capitalizations are generally above $5 billion representing approximately 80% of available market capitalization.

¹ Based on thematic sector baskets created by Goldman Sachs Global Investment Research

The Goods basket tracks companies with a North American Industry Classification System (NAICS) code indicating an industry which is goods-producing by the US Department of Labor. Goods-providing industries include Pharmaceuticals, Capital Goods, Technology Hardware & Equipment, and Energy.

The Services basket tracks companies with an NAICS code indicating an industry which is services-providing. Leading industries in the Services category include Software & Services, Media & Entertainment, Retailing, and Banks.