Sales growth will be the critical driver pushing stock prices higher over the next two years, according to analysts at Goldman Sachs Group Inc. (GS). While earnings growth has been the primary catalyst behind the S&P 500 Index's (SPX) push to break 2,500, increases in index constituents' top line sales will take over as the key force boosting to the 2,600 level by the end of 2019.

That's the key takeaway from Goldman's latest U.S. Weekly Kickstart report. With the S&P 500 up more than 270% from a 10-year low of 667 in March 2009, they estimate that earnings growth has accounted for 61% of that increase, fueled mainly by increased profit margins.

Goldman's Picks

Goldman's High Revenue Growth Basket includes 50 stocks that are poised to rise on strong revenue growth. Among them are these 12, with their projected sales growth rates in 2017 and 2018, respectively: online retailer Inc. (AMZN), 28% and 27%; video streaming service Netflix Inc. (NFLX), 30% and 22%; social network site Facebook Inc. (FB), 42% and 29%; online travel booking services Priceline Group Inc. (PCLN), 17% and 15%, and Expedia Inc. (EXPE), 16% and 14%; biotech companies Incyte Corp. (INCY), 33% and 14%, Alexion Pharmaceuticals Inc. (ALXN), 14% and 16%, and Celgene Corp. (CELG), 18% and 17%; Google parent Alphabet Inc. (GOOGL), 21% and 17%; payments processor PayPal Holdings Inc. (PYPL), 19% and 18%; and software vendors Adobe Systems Inc. (ADBE), 26% and 20%, and Red Hat Inc. (RHT), 18% and 14%.

The growth rate of S&P 500 sales per share has risen sharply since 2014 though it slowed to 9 percent at the end of 2016, as you can see by the chart below. 

S&P 500 Sales Per Share Chart

S&P 500 Sales Per Share data by YCharts

Far Above Average

Based on consensus earnings estimates, the 50 companies in Goldman's basket have median projected sales growth rates of 16% in 2017 and 14% in 2018, while the median for the entire S&P 500 is just 5% for both years. They also exceed the S&P 500 median for estimated 2018 EPS growth, 18% versus 10%. The forecasted 2018 EPS increases for the 12 stocks mentioned above are: Amazon, 88%; Netflix, 73%; Facebook, 21%; Priceline 16%; Expedia, 31%; Alexion, 28%; Celgene, 20%; Alphabet, 30%; PayPal, 19%; Adobe, 24%; and Red Hat, 18%. The projected EPS for Incyte is not meaningful, since it is coming off a loss.

To create its basket, Goldman included companies from each of the eleven S&P industry sectors, but over half are drawn from these three: information technology (12 companies), financials (7), and health care (7). Note that Amazon, Netflix, Priceline, and Expedia are classified as consumer discretionary firms, while Alphabet, PayPal, Adobe, and Red Hat are categorized as information technology companies.

S&P 500 Earnings Per Share TTM Chart

S&P 500 Earnings Per Share TTM data by YCharts

Goldman's Analysis

Trailing EPS for the S&P 500 has risen from $67 in 2009 to $130 in 2017, Goldman reports. While they estimate that 61% of the rise in the S&P 500 since its 2009 low is due to increased earnings, they also calculate that 11% is from an improved outlook for future earnings, and the remaining 28% from a higher aggregate forward P/E ratio on the S&P 500, which has risen from 10.1x to 17.7x today.

Additionally, since 2009, Goldman calculates that profit margins rose from 7% to 10%, and that this accounts for 80% of the increase in earnings. Sales growth contributed the other 20%. Note that Goldman excludes financials, utilities, and real estate from this part of their analysis. Going forward from today, Goldman believes that rising labor costs and interest rates are impediments to further improvement of profit margins. As a result, they conclude that growth in sales revenues will be key to higher share prices in the near future.


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