Depending on who you ask, you’ll get a different assessment of the economy.
“Our visit with West Coast investors this week revealed most clients have a more cautious economic outlook than we currently forecast,” wrote Goldman Sachs’ David Kostin in a new note to clients. “Most hedge fund and mutual fund clients expect growth will disappoint and is likely to be in the 2.0%-2.5% range.”
More from Kostin:
…Goldman Sachs economics research forecasts US GDP growth will accelerate during the next several quarters to a pace above 3%. We expect annual GDP growth will average roughly 3% during 2014, 2015, and 2016. The key drivers of the stronger growth include moderating fiscal drag (the fading of the impact of higher payroll taxes, government spending cuts, and the Sequester, all of which first hit in 2013). A falling savings rate will provide an additional tailwind to consumer spending in the next few years.
With this in mind, Kostin’s team is recommending the stocks of companies that have high operating leverage. These are the companies that would see earnings growth amplified as more revenue passes to the bottom line via a fixed operating cost structure. In other words, marginal increases in sales translate into accelerating gains in profits.
Our top near-term recommendation is for portfolio managers to own stocks with high operating leverage. A key part of our investment thesis is that the US economy will accelerate but profit margins will remain flat as they have during the past several years. Accordingly, operating leverage becomes essential to generate EPS growth. Within their respective sectors, companies such as AMZN, R, RHI, LUV, NFLX, PXD, EOG, BRCM, BSK, and MRK have a high degree of operating leverage and are constituents in our basket. We calculate degree of operating leverage as the ratio of revenue after variable operating costs to revenue after variable and fixed operating costs.
“We expect the S&P 500 will trade at 1750 at yearend 2013 (+4.0%) and 1825 in 12 months (+8.4%),” writes Kostin.