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For a stock market that’s hovered near record highs for the better part of two months, there’s a surprising lack of confidence that equities will finish the year on a tear.
The average year-end forecast across 20 Wall Street strategists calls for the S&P 500 to remain largely unchanged from current levels after rising roughly 8% in the first half of the year.
And even the most bullish strategist, Jonathan Golub from RBC Capital Markets, has a year-end price target of 2,600, which would mark a gain of just 7% for the benchmark over the next six months.
Even volatility, which spiked more than 30% on Thursday, has been too suppressed to create as many investment opportunities as traders would like. Despite the surge this past week, the CBOE Volatility Index, or VIX, still sits about 30% below its bull market average.
What’s more, economic growth in the US is the worst since 2011, at least according to one measure. The Citigroup Economic Surprise Index, which measures the extent to which data exceeds expectations, has been in negative territory since the end of April and sits at the lowest in six years.
But fear not, says Goldman Sachs. There are still ways to make healthy profits trading stocks, even in a lukewarm economic environment.
And the firm is putting its money where its mouth is. On Wednesday, Goldman raised its year-end S&P 500 price target to 2,400 from 2,300, right in line with consensus.
Here are four ways the firm says investors can reap profits from the stock market over the remainder of 2017. Note that these are not intended to be mutually exclusive. In a perfect world, a trader would be able to check all the boxes at once.
Use the “Rule of Ten” strategy, which helps pick stocks that can outperform during periods of modest economic growth
Goldman’s “Rule of Ten” method identifies stocks that have met the following four criteria:
- Increased sales by at least 10% in each of the last two years
- Forecast to grow sales by 10% or more in each of the next two years based on estimates from Goldman Sachs research analysts
- Have consensus long-term earnings growth of at least 10%
- Trade at an enterprise value-to-sales multiple above 7.5 times, because “these firms rarely grow sales fast enough to justify their elevated valuations”
So what kinds of companies fall into the Rule of Ten category? Goldman has identified 27 of them. The top 10 are: Square, Zendesk, Pure Storage, Wayfair, Netflix, GrubHub, Splunk, RingCentral, Amazon and Palo Alto Networks.
Seek out companies with the highest potential for margin improvement
Goldman’s criteria for this group requires a stock to have expected sales growing greater than 4%, and margin expansion of 50 basis points or more in both 2017 and 2018.
As such, tech and healthcare companies account for 60% of the stocks on the firm’s 30-stock list, which includes: Netflix, Abbvie, Alexion Pharmaceuticals, Nvidia, Symantec, Qorvo, Caterpillar, Vulcan Materials and Monsanto.
Buy tech stocks, which have already outperformed this year in a stagnant economic environment
AP Photo/Ben Margot
The slow pace of economic growth in the US this year has actually been a boon to tech stocks. The return for the group has been more than double that of the S&P 500, and that will likely continue as “growth opportunities remain scarce,” Goldman wrote.
The firm forecasts that tech companies will grow both profit and sales by 9%, a faster rate than the broader market on both counts.
Goldman does recognize, however, that the bullish tech trade is very crowded with hedge funds and other large speculators at the moment. Still, that only becomes a problem during periods of weakness, the likes of which the firm doesn’t foresee becoming an issue.
Buy financial stocks, which will benefit from the double dip of S&P 500-best earnings growth and looser regulation
The foundation upon which equity bull markets are built, earnings growth, can keep stocks afloat even when macroeconomic conditions are less-than-stellar.
Goldman sees the financial sector expanding profits by 13% in 2017 and 12% in 2018, the best growth in the S&P 500, excluding energy. Banks specifically are set to benefit from higher interest rates, to which they’re particularly sensitive.
Further, Goldman banks analyst Richard Ramsden forecasts that potential deregulation of the financial industry could “increase returns to shareholdersand boost bank EPS by 11%.”