Here are Goldman Sachs' tips for what US stocks to buy, and avoid, in 2017

Photo: Torsten Blackwood/ AFP/ Getty Images.

It’s the start of a new year, and after a year of ups and downs for US stocks in 2016 — in that order — investors are now wondering what will happen next.

And, more importantly, what sectors will likely outperform in the year ahead, and what ones should be avoided.

For Goldman Sachs’ global investment research team, there’s likely to be two standout performers in 2017: financials and information technology.

“Both sectors will benefit under our macroeconomic outlook of rising interest rates and offer strong earnings growth prospects at reasonable valuations,” it said in a note released in late December.

For financials, the bank says the sector remains “attractively valued despite the recent rally and will benefit if inflation and interest rates continue to rise”.

In the absence of an unexpected turn in US economic growth, Goldman says it “would be the clearest beneficiary from higher inflation and interest rates given it is most sensitive to changes in bond yields, as higher rates boost net interest margins”.

For information technology, it expects modest GDP growth, strong earnings growth and a reasonable valuation, along with the likelihood of a one-time, low repatriation tax rate, will also see the sector outperform in 2017.

“The sector should benefit from the proposed one-time repatriation tax rate, given 32% of aggregate S&P 500 overseas earnings is held by info tech firms,” it says.

Goldman acknowledges that proposed protectionist trade policies from incoming US president-elect Donald Trump pose a risk to the sector, although it suggests this risk is tempered by the fact its returns “demonstrate minimal correlation with the US dollar”.

This table shows Goldman’s sector allocation stance heading into 2017, evaluating the prospects for each using fundamentals, macroeconomic factors, investor positioning and expected policy changes.

While the bank expects those sectors to outperform in the year ahead, at the other end of the spectrum, it says that investors should remain underweight “bond proxies” such as consumer staples, telecom services, utilities and real estate given its forecasts that both interest rates and bond yields will continue to rise in 2017.

“We expect these sectors will lag as rising interest rates diminish the attractiveness of high dividend yields and other bond-like characteristics,” it says.

“While these domestic-facing sectors will avoid the headwind of a strong dollar and current valuation is inexpensive relative to history, we expect rising rates will drive the sectors’ relative underperformance.”

Outside of the above mentioned sectors, Goldman recommends that investors maintain neutral positioning in global cyclicals such as energy, materials and industrials given “expensive valuations relative to history and headwinds from a strong US dollar”.

It also says that while health care is attractively valued relative to historic averages, its expects a mixed performance in 2017 “given ongoing policy uncertainty and stalling fundamentals”.

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