The global profits recession that has been plaguing investors for months may finally be easing. In a recent report, Goldman Sachs identified 50 stocks expected to grow their profitability. The median stock should increase profitability by 13% over the next year, well above the S&P 500. For months, Wall Street analysts have pointed to a global earnings recession that has squeezed corporate profit margins, ensuring that only companies with the strongest fundamentals would survive unscathed. But according to a recent report from Goldman Sachs, it may seem that the worst of this profits recession is now behind us.
“After declining for four straight quarters, the S&P 500’s ROE rose by 34 basis points in the first quarter to 20.4%, reflecting a better-than-feared Q1 earnings season and aligning with our view that the worst of the profit margin reset is likely behind us,” wrote a team of Goldman Sachs analysts, led by chief US equity strategist David Kostin.
The recent rise of the S&P 500’s return on equity, or ROE — a metric that measures overall profitability — may indicate a light at the end of the tunnel for poor profits across the market.
But despite this good news, Kostin cautioned that the S&P 500’s overall ROE still remains below its level this time last year, which he primarily attributed to declining operating margins.
“We expect EBIT margins will be the most important factor for ROE in the near term, as long-standing tailwinds of lower taxes and interest rates have reversed recently,” he explained.
On a sector level, Kostin also highlighted that ROE levels rose year over year for only three of the 11 sectors: energy, industrials, and utilities. However, he also noted that the ROE levels for eight of these sectors still remain above their historical averages, with utilities, financials, and real estate the exceptions.
Although Kostin believes that, for now, ROE levels have potentially plateaued, he doesn’t believe that profitability will substantially grow in the near term.
“While input cost pressures have subsided, the slowing pace of price hikes may prevent profitability from rising substantially in the near term,” he explained. “However, resilient nominal sales growth and a weaker US dollar in 2024 should support EBIT margins.”
50 stocks with the highest-consensus ROE growthIn the report, Kostin and his team identified a basket of 50 stocks expected to have the highest ROE growth in the market over the next 12 months. “The median stock in the basket is expected to grow ROE by 13% over the next 12 months, versus -9% for the median S&P 500 company,” Kostin wrote.
Additionally, Kostin expects the rise of artificial intelligence to provide a long-term catalyst for profits by boosting overall productivity, especially for companies with higher labor costs and therefore a greater chance at workforce automation.
Finally, Kostin noted that the performance of these ROE growth stocks is dependent upon whether the US economy experiences a hard landing, as consensus expects, or whether the Federal Reserve is able to stick a soft landing in the near term.
The 50 stocks Goldman Sachs believes will increase their returns on equity the most over the next 12 months are below, along with their ticker, sector, and consensus ROE growth expectations.