- As the economic recovery continues, many firms can expect to see return on equity (ROE) growth over the next twelve months.
- Accordingly, Goldman Sachs’ equity strategists updated their ROE Growth basket to pinpoint companies with the highest profit growth expectations.
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Despite soaring stock valuations since March, many companies’ fundamentals have weakened as a result of the economic slowdown from COVID-19.
According to a recent note from Goldman Sachs, this bodes well for future gains across a variety of market sectors, as firms will see a rebound in profit growth as the economic recovery continues into next year.
More specifically, companies will receive a boost to their return on equity (ROE), which can be used to assess the financial health and performance of management of a company. The indicator is known to be a favorite of legendary investor Warren Buffett.
This aligns with the investment bank’s forecast that downtrodden value stocks, which are strongly correlated with Goldman’s ROE Growth basket of stocks, will see a boost from the recovery.
“We continue to see opportunity for a near-term rotation towards Value. Potential tax reform represents one near-term catalyst. We previously found that Biden’s proposed plan would have the largest negative earnings impact on popular growth sectors Info Tech, Communication Services, and Health Care,” Goldman Sachs Chief US Equity Strategist David Kostin said in the note.
Though he sees a Democratic tax plan as a risk, he said nixed tariffs and fiscal stimulus would likely offset a tax increase, at least at the outset, he said.
Kostin added that a COVID-19 vaccine approval this year would likely drive a rotation away from growth stocks and into value. He further explained how the elections could boost value stocks and the ROE Growth basket by extension:
“Similarly, the Biden campaign has proposed an increase in the capital gains tax. The Info Tech and Consumer Discretionary sectors have been the largest sources of capital gains within the US equity market during the last 3, 5, and 10 years.”
To get ahead of gains over the next 12 months amid the economic recovery, Kostin and his team updated their basket of 50 stocks poised to see ROE growth. Below, in no particular order, are the 25 with expected ROE growth above the basket’s median of 18% over the next 12 months.