Analysts at Goldman Sachs said in a research note Wednesday they expect corporate profits, supported by healthy economic growth, to be the primary driver of forward equity returns
The investment bank believes stocks with high operating leverage are poised to benefit, although, at the index level, the potential for further valuation expansion will be limited by already elevated multiples and high-interest rates.
"Companies with a high degree of operating leverage can generate more sales without increasing costs. As a result, margins can expand and earnings can grow faster for high operating leverage stocks compared to low operating leverage stocks," wrote Goldman Sachs.
In addition, the bank believes the outlook for S&P 500 sales growth also suggests that high operating leverage stocks will outperform low operating leverage stocks.
Furthermore, the case for high operating leverage stocks is strengthened by the near record valuation discount to low operating leverage stocks, according to the bank that believes a shift in consensus makes the trade attractive today.
"Increasing investor confidence in the strength of the US economy has resulted in positive 2024 sales revisions YTD. High operating leverage stocks have also historically performed best when the ISM Manufacturing Index is in expansion territory," added the bank.