Earnings season will be in full swing next week, and investors are becoming increasingly worried about how profits will stack up amid a slew of discouraging economic data, recession fears, and the ongoing trade war.
In a note this week, Goldman Sachs’ David Kostin pointed out that consensus estimates for earnings anticipate companies in the S&P 500 will report a decline in earnings per share of -3% for Q3 marking the first year-over-year quarterly fall since Q2 of 2016.
But despite this, the firm says that there’s a group of stocks that can still grow margins.
Goldman’s new “stable growers” basket—which is exclusive to its clients—is currently beating the market with a 27% return so far this year compared to the S&P 500’s 16% return. The 50 stocks in this basket have the lowest volatility of quarterly earnings growth over the past decade.
“Stable growth stocks fare best in environments of slowing economic growth and rising uncertainty,” Ben Snider, an equity strategist at the bank, wrote in a note. “The sharp outperformance of stocks with stable earnings growth has widened their valuations relative to volatile growth stocks to the largest premium on record.”
According to Snider, this group of stocks could perform well if the uncertainties that have been plaguing the market recently continue. Stocks have been under pressure lately from the escalating trade war between the U.S. and China, an economic slowdown spurred on by that trade war, growing fears about a global economic slowdown, geopolitical concerns, and just last week, the impeachment inquiry of President Trump.
And while the stock market has seemingly gone no where in the last two years, Goldman’s basket of stable growers has returned 22% over the last two years.
“We believe investors should generally bias their portfolios away from stocks with the most volatile growth,” Snider wrote. “Growth stability has had an impact on long-term stock performance.”
Stocks in the stable growers basket include Google-parent Alphabet (NASDAQ: GOOGL, GOOG), Costco (NASDAQ: COST), HCA Healthcare (NYSE: HCA), Home Depot (NYSE: HD), Mastercard (NYSE: MA), McDonald’s (NYSE: MCD), Quest Diagnostics (NYSE: DGX), Visa (NYSE: V) Waste Management (NYSE: WM), and Walt Disney (NYSE: DIS).
Kostin noted that while many of these stocks may not be as cheap as investors would like, he reiterated that one should “generally tilt portfolios away from volatile growth stocks which have consistently lagged the market.”