GOLDMAN SACHS: Buy these 17 stocks to profit from their still-expanding returns while a key driver of market performance weakens

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  • Goldman Sachs says US stocks will deliver weaker returns on equity (ROE) in 2022 and 2023.
  • ROE is a traditional measurement showing how efficient a company is at turning profits.
  • Chief US Equity Strategist David Kostin lists a group of companies that should beat that trend.

For everything that went wrong in late 2021 and the first half of 2022, stocks actually got more efficient at generating returns, according to Goldman Sachs.

But that trend is starting to fade, and it looks like things are heading back in the wrong direction.

“S&P 500 profitability over the last twelve months has held up against inflated input costs, Omicron, and supply chain disruptions,” Goldman Sachs Chief US Equity Strategist David Kostin wrote in a note to clients in July. In the note Kostin explains that returns on equity (ROE) for S&P 500 companies were far better in the first quarter of 2022 than they had been a year earlier.

That’s impressive considering the obstacles that were cropping up in the first few months of the year, including high input costs, high inflation, and supply chain issues, as well as big changes in consumer behavior.

But all of those issues are still affecting market performance, and they’re beginning to take a toll on ROE — according to FactSet, analysts currently expect ROE to slip 4% over the next year.

“Due to the uncertain macroeconomic backdrop and outlook for corporate fundamentals, the outlook for S&P 500 ROE appears more challenging,” Kostin said. “Two main risks exist to the forward path of ROE: EBIT margins and borrow costs.”

In Goldman Sachs’ view, stocks and major indexes are trading at fair values relative to the returns on equity that stocks are delivering. But that might not be true if returns start to shrink and stocks continue their recent bounce.

So Kostin and his team updated their firm’s list of stocks with the highest expected returns on equity over the next year. While US stock returns are expected to dip, the 17 stocks below are all expected to post ROE growth of at least 20%. They’re ranked from lowest to highest based on those estimates, which were collected by FactSet.