Goldman: Expect a delay in tax reform and watch the market fall ... except for these stocks

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Goldman Sachs told clients the market will fall the rest of the year because of uncertainty over how President Donald Trump's economic agenda will fare in the Republican-led Congress, but there is still an investment strategy that can outperform.

"The boost to earnings from a lower corporate tax rate is likely to be smaller and to occur later than investors originally expected," strategist David Kostin wrote in a note to clients Friday. "The S&P 500 fell ... this week as investors came to terms with greater policy uncertainty. Debate over the Republican health care plan, the American Health Care Act, sparked investor concern about the probability and timing of anticipated policy tailwinds to earnings."

The strategist forecasts the S&P 500 will trade at 2,300 at the end of 2017, representing a 2 percent decline from Friday's close.

Kostin noted how the current House Republican tax reform plan proposes a corporate tax rate reduction to 20 percent from 35 percent. He estimates every 5 percentage point reduction of the effective tax rate will lift S&P 500 earnings by 6 points. However, the firm's economists predict the corporate tax rate will be cut to only 25 percent.

"Our Washington, D.C. economist expects legislation that lowers the corporate tax rate and makes incremental tax reforms to be enacted by late 2017 or early 2018, meaning corporate earnings will likely not be affected any earlier than next year," he wrote.

Fortunately, the financial sector deregulation doesn't depend on congressional approval, according to Goldman Sachs. The firm predicts $200 billion of excess capital will be deployed by banks next year as a result of changes in capital requirements.

"The Trump Administration has called for broad deregulation and investors are focused on financials as the firms with the most to gain," he wrote. "Our banks analysts expect that reform will likely come through changes to existing rules as well as the interpretation and application of outstanding regulations."

To take advantage of the upcoming deregulation, here are four financial stocks Goldman recommends in its return on equity (ROE) growth basket.

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