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Pro Analysis

Here's how to trade Goldman's 'wave election' theory

Wave crashing
Gent Shkullaku | AFP | Getty Images

This is shaping up to be a "wave election," which will have dramatic implications for the stock market and how sectors will perform in the coming year, according to Goldman Sachs.

Even though it may be negative for the S&P 500 in the short run, the firm told investors Friday to buy companies that will benefit from corporate tax reform.

A so-called "wave election" occurs when one party gains at least one Senate seat and at least 20 House seats, which is likely to occur this November for the Democrats based on current polling.

As CNBC told you in this story, Goldman's strategist David Kostin found during the last six "wave elections" it was negative for the S&P 500 on average during the next few months.

So how can you trade it?

Even if the market declines on the election, there are several strategies that can do well, according to the firm.

"The candidates would likely look toward corporate tax reform, particularly on untaxed foreign profits, to fund their expansionary fiscal policies," Kostin wrote in the note to clients. "Politicians on both sides of the aisle have advocated for a repatriation holiday, where untaxed foreign profits are taxed at a lower, one-time rate."

He cited how U.S. corporations have $2.9 trillion of earnings parked overseas that can be repatriated on a potential tax repatriation holiday. As a result, Kostin recommended investors buy stocks in the Goldman Sachs "High Overseas Earnings" basket to take advantage of the call.

Here are five stocks from the Goldman Sachs "High Overseas Earnings" basket.