50 Stocks to Buy As Interest Rates Rise. Goldman Sachs

  • Higher interest rates are weighing on both corporate earnings and stock valuations.
  • Firms with high returns on equity that can efficiently generate profits have led this year.
  • Goldman Sachs listed 50 stock picks with the highest returns on equity.

A long-awaited verdict from the Federal Reserve finally arrived on Wednesday afternoon. the US central bank raised interest rates by 75 basis points (0.75 percentage points).

Markets have already priced in much of the pain that rate hikes bring, but the selling in the wake of the red-hot August inflation report illustrated that stocks still have plenty of downside. Both valuations and fundamentals are in the crosshairs as rates rise, according to Goldman Sachs.

“This week’s inflation print stoked concerns about the outlook for valuations as well as corporate profitability,” wrote David Kostin, the firm’s chief US equity strategist, in a September 16 note. “Equity valuations have closely tracked the path of interest rates during recent years.”

Profits and valuations are under pressure as rates rise

Higher interest rates in response to rampant inflation have taken a toll on corporate profits. The S&P 500’s return on equity (ROE), which is a measure of how efficiently firms achieve profits, fell to 21% in the second quarter as margins retreated, according to Goldman Sachs.


Goldman Sachs

While the decline in the financial sector was especially large, only four sectors increased ROE in the second quarter. Goldman Sachs expects those cross-sector troubles to continue in 2023 as the economy weakens and as interest rates and tax rates climb.

“Looking forward, the risks to S&P 500 ROE appear tilted to the downside, with margins the primary downside risk,” Kostin wrote. “Our baseline forecast is that net margins will contract by 25 bp [0.25 percentage points] in 2023 to 12% alongside positive but decelerating economic growth. In a recessionary scenario, we would expect profit margins to fall by 126 bp to 11%.”

For comparison, consensus estimates are for S&P 500 profit margins to rise by 14 basis points to 12.4% in 2023, Kostin noted. He added that those overly optimistic marks will be lowered.

Valuations have been hit even harder this year, according to Goldman Sachs. The S&P 500’s price-to-earnings (P/E) ratio has declined 22% in 2022 to 16x as rates and inflation have risen, Kostin noted, and a further drop is likely as the Fed continues to tighten fiscal policy.

50 profitable stocks to buy

While profit margins shrink and valuations contract, Goldman Sachs has updated its list of companies that are expected to increase their returns on equity (ROE) the most in the 12 months. This sector-neutral basket of 50 stocks has beaten the S&P 500 by 7 percentage points so far this year.

The median stock among this collection is expected to increase ROE by 14% over the next 12 months, according to Goldman Sachs. But the outlook for high ROE stocks is still challenging, in Kostin’s view, given that investors may overlook the future in favor of firms with high ROE right now.

“Investors typically choose between rewarding companies with high ROE today or seeking firms with the potential for high ROE growth in the future,” Kostin wrote.

Below are the 50 high-ROE stocks that Goldman Sachs highlighted, including 21 new additions this quarter, along with their ticker, sector, forward ROE, and ROE growth. The stocks that are new to the list are marked accordingly.

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