Market Extra: As the trade war heats up, Goldman says take cover in these stocks

The two largest economies in the world are in a collision course over trade.

The U.S. and China are locked in a trade-and-tariff tiff that threatens to rattle the global economy. Yet, analysts at Goldman Sachs remain surprisingly sanguine, if not upbeat.

David Kostin, chief U.S. equity strategist at the investment bank, late Wednesday maintained his S&P 500 target of 2,850 for the year-end even as he listed a number of issues, including escalating tensions with China, that had turned against the market since President Donald Trump was voted into office nearly two years ago.

The strategist expects the bull market, in its ninth year, to extend its run into 2019 on the back of robust earnings as sales and profits at U.S. companies are expected to rise and outperform market expectations. Earnings this year are forecast to rise 19% to $159 and then 7% to $170 next year.

But the strategist admits that valuation is stretched although not extreme with the S&P 500 trading at a 86th percentile versus the average over 40 years. The forward price-to-earnings ratio—a popular gauge to value stocks—hovers at 16 to 17 times. That means an investor will have to spend $16 to $17 for $1 in earnings.

The economy should also do its part to keep the stock market buoyant, turning in gross domestic product growth of 2.9% in 2018. Kostin expects core personal-consumption expenditures inflation, the Federal Reserve’s preferred measures of rising prices and inflation, to hit 1.9%, providing some support for the U.S. central bank to hike interest twice more this year and four times in 2019.

Meanwhile, Kostin & Co. said many of the factors that had been viewed as hopeful in the wake of Trump’s election have become points of concern, including a lack of follow through legislation on the heels of the much-vaunted tax reform, wage inflation, tightening monetary policy and a shift toward protectionism.

Then and Now

Against this backdrop, the strategist recommends that investors focus on stocks of companies with high sales growth and those with strong balance sheets. He also recommended buying shares of financial companies and has an overweight rating for the information technology sector.

Goldman projects that sales at top five stocks, Facebook Inc. FB, +2.19% Amazon.com Inc. AMZN, +2.41% Alphabet Inc. GOOG, +2.64% GOOGL, +2.58% Apple Inc. AAPL, +1.72% and Microsoft Corp. MSFT, +2.25% will be four times higher than S&P 500 sales.

That said, it is worth noting that Kostin identified tech, along with materials and energy, as one of the most exposed to international sales with 59% of its revenue from overseas. In fact, tech and internet names dominated Goldman Sachs’ list of companies with sizable exposure to China.

Meanwhile, stocks were trading higher on Thursday as reports hinted that the U.S. and China may resume negotiations which had recently stalled. The S&P 500 SPX, +0.87%  and the Dow Jones Industrial Average DJIA, +0.91%  both rose nearly 1% and the Nasdaq COMP, +1.39%  rallied more than 1% as technology stocks outperformed other sectors.

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