Corporate profits are likely getting squeezed amid soaring inflation and lingering supply chain disruptions as the second-quarter earnings season kicks off. But Goldman Sachs says there are a number of quality companies that are more insulated from these macro headwinds. The Wall Street firm found that the S & P 500 ‘s return on equity, or ROE, just began to fall from 2021’s all time high on a 12-month basis as inflated input costs continue to threaten profitability. ROE, the measure of a company’s net income divided by its shareholders’ equity, is a widely used metric to gauge a company’s profitability. “Due to the uncertain macroeconomic backdrop and outlook for corporate fundamentals, the outlook for S & P 500 ROE appears more challenging,” Goldman chief U.S. equity strategist David Kostin said in a note. “Two main risks exist to the forward path of ROE: EBIT margins and borrow costs.” Borrowing costs are expected to leap from here as the Federal Reserve keeps aggressively raising interest rates to tamp down inflation. To help investors navigate a challenging environment marked by slowing growth, Goldman rebalanced its “ROE Growth” basket comprised of 50 stocks with the highest consensus expected ROE growth during the next 12 months. The median stock in the basket is expected to expand ROE by 14% during the next 12 months compared with a 4% decrease for the median S & P 500 company. Stocks with highest expected ROE growth in 2023 include Disney , Aptiv PLC, and energy players Hess and Coterra Energy , all of which have a growth rate north of 30%. Goldman said the energy sector experienced the largest year-over-year increase in ROE growth, followed by industrials and materials.
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