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President Donald Trump speaks alongside Senate Majority Leader Mitch McConnell (R), as they hold a meeting about tax reform in the Roosevelt Room of the White House in Washington, DC, September 5, 2017.
Goldman Sachs says the division between the chaos in Washington and the relative stability with the rest of the country is confusing investors.
Goldman’s chief U.S. equity strategist, David Kostin, described what he sees as “two Americas: Policy gridlock and high volatility inside the beltway but economic growth and low volatility outside Washington, D.C.”
This division is one reason why Kostin has a year-end S&P 500 target of 2,400, representing a 1 percent slip from current levels, and noted that he believes the current economy will continue to grow at only 2 percent per year.
Despite the gloomier outlook, Kostin did offer some trading strategies for investors to pursue over the next few months. Specifically, he noted that companies with low labor costs and high growth are two potential avenues for stock upside, as anticipated inflation accelerates and technology steams ahead.
“Stock with low labor costs will outperform as wage inflation accelerates and squeezes profit margins,” wrote Kostin. The strategist noted that wage acceleration is evident when comparing growth from the period between 2011 and 2015 with the period from 2015 onward.
According to Goldman Sachs research, average hourly wage growth in the information industry jumped to about 4.49 percent in the time since 2015 from about 2.93 percent in the 2011 to 2015 period. If wage growth continues to climb, that could put pressure on firms with more workers.
Firms that have low labor costs as a percentage of revenue include Netflix, Molson Coors and Valero Energy. All of those firms expend less than 2 percent of revenue as labor costs.
Stocks with strong sales growth stories also made Kostin’s list as possible performers during this tough backdrop, especially those in the information technology sector.
Highlighting popular big tech firms Facebook, Amazon, Apple, Google, and Microsoft, Kostin noted that these stocks are expected to post huge sales numbers going forward.
“The 5 stocks are forecast to grow sales 4x the rest of the S&P 500 at 2x the margins,” he said, acknowledging that the stocks are also popular among hedge-fund and mutual-fund holdings.
Their combined weight accounts for 13 percent of the S&P 500 and 43 percent of the Nasdaq 100, according to Goldman research. All of the recommended stocks have had strong growth year to date, with Facebook’s stock up nearly 50 percent.