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The US midterm elections could accelerate the ongoing rotation in stock markets, with the healthcare sector emerging as a potential defensive investment, according to Lou Miller, Global Head of Custom Basket Trading at Goldman Sachs.
Speaking on Goldman Sachs' The Markets podcast, Miller highlighted that investors had already begun shifting towards defensive positions before the midterm elections, amid a challenging environment for active investors during the second half of 2026. "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," he said. Highlighting the sharp correction in artificial intelligence (AI)-related investments, Miller noted that data centre stocks have declined 36 per cent from their highs earlier this year, while memory stocks have fallen 42 per cent, optical networking stocks 46 per cent and NeoCloud stocks 57 per cent. " I think the silver lining is the bar is much, much lower for surprises and there are positive catalysts ahead," he said. "The multiple for the data centre trade is about half of what it was in June," Miller said, adding that valuations have declined to healthier levels, lowering expectations and creating opportunities for positive surprises. Miller identified healthcare as a potential beneficiary of the next phase of AI adoption. As per Miller, healthcare could be among the few sectors witnessing accelerating earnings growth next year. "I think the next leg of the AI trade is actually healthcare, and I think that's also a very defensive sector that historically is very uncorrelated to AI," he said. Miller noted that healthcare companies are increasingly adopting AI in areas such as medical tools and diagnostics, with the sector witnessing a shift from challenges to growth opportunities. Meanwhile, he cautioned against traditional defensive sectors such as consumer staples, arguing that elevated valuations have reduced their attractiveness. "Expensive defensives I don't think are defensive," he said, suggesting investors focus on companies with strong balance sheets, quality earnings and healthy free cash flows. Outlining his preferred investment strategy, Miller said, "I think the S&P 500 excluding AI is the trade," citing attractive valuations and earnings growth prospects. Looking ahead, he identified employment, inflation, corporate earnings and the US Federal Reserve's December 9 policy decision as key market drivers. On the year-end outlook for US stock markets, Miller expressed cautious optimism, anticipating a modest rally, which he described as a "relaxed Santa Rally." (ANI)
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