The latter half of 2018 was painful—that may be putting it mildly—but if history is any guide, 2019 could be a great year for stocks. That’s according to Goldman Sachs, in a note written by strategists led by David Kostin.
The investment bank says that the S&P tends to rebound after declining 20% in a quarter, and notes historical precedents including policy concerns and late-cycle drawdowns show that there’s potential for big upside this year. On Christmas Eve, the S&P 500 briefly fell into bear market territory, and ultimately ended 2018 down 6.2% after having climbed for two years.
Since then, the S&P 500 index is up around 12% spurred on by dovish statements from the Fed and continued trade talks with China. But while Goldman believes there’s potential for big gains this year, the bank remains cautious and the strategists led by Kostin advise that investors boost their cash holdings and invest in high-quality stocks and those that are forecasting soaring margins this year.
The strategists say high-quality stocks are a good place to be and say to look for those companies that offer a superior return on equity compared to the S&P 500 with strong balance sheets. These companies include Google-parent Alphabet (NASDAQ: GOOGL, GOOG), BlackRock (NYSE: BLK), Comcast (NASDAQ: CMCSA), PepsiCo (NASDAQ: PEP), and Wells Fargo (NYSE: WFC).
Companies with high and stable gross margins that have strong pricing power will likely be better able to withstand climbing input costs. Such companies include Idexx Laboratories (NASDAQ: IDXX), National Instruments (NASDAQ: NATI), VMWare (NYSE: VMW), and Waters Corp (NYSE: WAT).
And stocks that can boost margins by 50 basis points annually are also attractive, but they noted that such companies are scarce because of late-cycle dynamics. However, there are still a few of these companies out there, including Chipotle Mexican Grill (NYSE: CMG), Expedia (NASDAQ: EXPE), Netflix (NASDAQ: NFLX), and TripAdvisor (NASDAQ: TRIP).