U.S. stocks could deliver big gains in 2019 if history is any guide, and some companies have more potential to outperform than others, according to Goldman Sachs Group Inc.
The S&P 500 typically rebounds after declining 20 percent within a quarter, and historical precedents of policy concerns and late-cycle drawdowns show potential for major upside, strategists led by David Kostin wrote in a Jan. 11 note.
The U.S. benchmark came to the brink of a bear market late December before ending 2018 down 6.2 percent after two years of gains.
Expectations of a positive outcome from the trade talks and dovish commentary from Federal Reserve officials have seen the S&P 500 advance more than 10 percent since coming within a whisker of a bear market on Christmas Eve.
While Goldman sees potential for big gains, the firm has been relatively cautious, with strategists led by Kostin last week advising investors to boost their cash holdings.
Companies with high and stable gross margins would be one area to consider, as businesses with strong pricing power may be better able to withstand rising input costs, they wrote in the Jan. 11 report. Such firms would include National Instruments Corp., Waters Corp., VMWare Inc. and Idexx Laboratories Inc.
Stocks forecast to boost margins by 50 basis points annually would also be attractive, the reports said. It added that such firms are scarce due to late-cycle dynamics, but they would include Netflix Inc., TripAdvisor Inc., Expedia Group Inc. and Chipotle Mexican Grill Inc.
High-quality stocks would also be good, according to the strategists, who bestow that label on equities with a superior return on equity versus the S&P 500, low drawdown risk and strong balance sheets. Alphabet Inc., Comcast Corp., PepsiCo Inc., Halliburton Co., BlackRock Inc. and Wells Fargo Corp. are among companies making the cut in that list.
Goldman also noted that stocks exposed to U.S.-China trade have lagged, including Micron Technology Inc., Corning Inc. and MGM Resorts International.
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