Goldman's 3 strategies to play a market it thinks is running out of steam

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Goldman Sachs sees a “slim-upside” to its target for the S&P 500 index this year and is giving investors three approaches to navigate an opaque market.

The firm believes the S&P 500 will rise to 3,000 by the end of the year, which is a 3.2% increase from Friday’s close of 2,907. Goldman believes investors face a “challenge” in terms of “what to buy and what to sell in the current market environment.”

Here are the three strategies Goldman recommended to its clients, as well as some stocks that meet two or more of these criteria. Those stocks include several in health care – Gilead Sciences, Biogen, AbbVie, Amgen — and several smaller companies in the technology sector, such as Amphenol, VeriSign and Lam Research.

Operating leverage is a measure of how much a company can increase its operating income by increasing its revenue. Goldman recommends stocks with low operating leverage, because shares of those companies “outperform as the economy decelerates.”

“Modest growth means that firms with a low ratio of revenue after variable operating costs to revenue after variable and fixed costs should outperform stocks with a high degree of operating leverage,” Goldman said.

The U.S. unemployment rate remains below 4% while wage inflation continues to accelerate. Goldman noted the combination means companies “with low labor costs as a share of revenues” are therefore “less susceptible to negative EPS revisions.”

“Downward pressure on record-high profit margins from labor inflation may prompt negative EPS revisions that are often associated with falling share prices,” Goldman said.

“Short-term and long-term US interest rates are forecast to remain low for a considerable period of time,” Goldman said.

This means that investors should prioritize stocks that have both “a higher dividend yield” as well as a “faster annualized dividend growth during the next two years,” Goldman said.

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