A rising tide of forces is boosting costs and squeezing profit margins across corporate America. The main drivers behind this trend are Fed rate hikes, higher labor costs, inflation, and what many experts expect to be a slower economy next year. Goldman Sachs argues that dozens of stocks with robust growth in return on equity (ROE) will outperform in this environment. "We continue to recommend growth stocks and highlight our basket of firms with the strongest expected ROE growth as margin pressures continue to intensify. Just as growth stocks typically outperform as economic growth decelerates, firms managing to expand ROE should outperform as headwinds build against ROE growth," Goldman says. 

Among the 50 stocks in Goldman's ROE growth basket are these 10: TripAdvisor Inc. (TRIP), Under Armour Inc. (UAA), Expedia Group Inc. (EXPE), Nike Inc. (NKE), MetLife Inc. (MET), Amgen Inc. (AMGN), IQVIA Holdings Inc. (IQV), Union Pacific Corp. (UNP), Apple Inc. (AAPL), and Cisco Systems Inc. (CSCO). Note that the selection criterion for Goldman's basket is fast projected growth in ROE, not necessarily a high ROE, though a given stock therein may offer both. The table below ranks these stocks by the ROE growth rates projected by Goldman, from ROE based on last 12 month (LTM) earnings to ROE based on next 12 month (NTM) earnings. Goldman made the recommendations in its latest U.S. Weekly Kickstart report.

10 Fast-Growth Stocks That Can Lead

Stock ROE Growth YTD Total Return
Apple 46% 28%
Cisco 46% 19%
Under Armour 46% 26%
TripAdivsor 41% 30%
Union Pacific 38% 15%
Expedia 38% (3%)
Amgen 35% 14%
MetLife 27% (11%)
Nike 26% 20%
IQVIA 16% 25%

Source: Goldman Sachs; calculations as of Oct. 11.

Significance For Investors

The median stock in Goldman's high ROE growth basket has a forward ROE of 19% and a projected ROE growth rate of 23%. The figures for the median stock in the S&P 500 Index (SPX) are 19% and 2%, respectively. These findings were presented in the same report which asserts that fundamentals remain strong, pointing to more stock market gains ahead. Among these fundamentals are ROE figures for the S&P 500 that have been rising rapidly, and are at or near record levels.

"Just as growth stocks typically outperform as economic growth decelerates, firms managing to expand ROE should outperform as headwinds build against ROE growth." -- Goldman Sachs

Goldman indicates that "mounting inflationary pressures" are a growing concern of investors, and they say that "rising U.S. labor costs [represent] a key risk." Another big worry surrounds tariffs, which are also raising costs and compressing margins. Goldman assigns a 60% probability to the likelihood that the U.S. will place tariffs on most or all of $267 billion worth of imports from China that have not been targeted already. Rising interest rates are another headwind for ROE growth, but so far they have mainly acted to reduce equity valuations, rather than raise corporate costs significantly, Goldman observes.

Railroad operator Union Pacific presents an interesting case, since it should be a beneficiary of rising freight rates, which a recent Morgan Stanley report cites as a major macro force that is putting downward pressure on other companies' profit margins. Its projected ROE growth rate of 38% is far above the basket median of 23% and the S&P 500 median of 2%. Meanwhile, its forward ROE of 37% is nearly double the 19% figure for both the basket and the S&P 500.

Union Pacific's second quarter EPS, the best-ever figure for the company, was up by 36.6% year-over-year (YOY) and beat the consensus estimate by 2.1%, per Zacks Investment Research. Consensus estimates call for 39.3% YOY EPS growth for the third quarter, and 34.6% in the fourth quarter, also per Zacks. Union Pacific is due to report on Oct. 25.

Looking Ahead

Rising interest rates, inflation, and labor costs, as well as the likelihood of a slowdown in demand, are forces that give stocks with fast-growing ROE the potential to outperform going forward. Third quarter profit reports should indicate whether these stocks are still on a growth path, or if they are starting to encounter headwinds.