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How Goldman Sachs is playing the upcoming earnings season: Bet on stocks with real organic growth

  • Goldman Sachs' chief equity strategist tells clients to expect solid S&P 500 sales growth of 10 percent, the fastest pace since 2011.
  • "Consensus forecasts double-digit sales growth in energy, information technology, and materials," wrote David Kostin, the firm's top stock strategist.
  • Goldman highlights several names like Netflix, Amazon and BlackRock as potential outperformers.

Goldman Sachs is encouraging clients to buy shares of companies with organic sales growth ahead of the first quarter earnings season and not ones with numbers possibly inflated by the tax cut.

"We recommend investors focus on organic growth reflected in sales and pre-tax margins, rather than the tax cut-assisted EPS growth," wrote David Kostin, Goldman's top equity strategist. "Consensus forecasts double-digit sales growth in energy, information technology, and materials. Strong top-line growth is consistent with solid economic activity in the first quarter."

The bank's chief equity strategist told clients to expect solid S&P 500 sales growth of 10 percent, the fastest pace since 2011.

A weaker U.S. dollar should also buoy revenues, the strategist added, as a weaker greenback typically promotes exports and better-than-average sales beats.

Kostin highlighted several names like Netflix, Amazon and BlackRock as potential outperformers.

"Tax reform will provide the largest boost to previously high-tax rate sectors such as Telecom Services and Consumer Discretionary," Kostin wrote. "Consensus expects the reduced tax rate will contribute 7 percentage points to full-year EPS growth of 19 percent. However, our 14 percent top-down 2018 EPS growth estimate in part reflects the fact that all the benefits of lower taxes may not inure to shareholders."

But despite the largely bullish outlook, Goldman's equity team did acknowledge recent volatility in the market, including four single-day moves of 1 percent or more in the S&P 500 last week.

"The combination of regulatory risks for technology firms and trade friction between the U.S. and China has contributed to market uncertainty," Kostin wrote. "The Cboe volatility index (VIX) has averaged 18 year-to-date, compared with 11 in 2017."

Netflix, already up 50 percent this year, has been shifting its attention overseas in its effort to build up its global market share, according to multiple Wall Street analysts. Though frequently criticized for its steep costs and cash burn, Netflix has steadily worked to build its original content in an effort to attract even more monthly subscribers.

Financial services giant BlackRock will report earnings on Friday, hoping to top Wall Street earnings expectations of $6.41 per share. The largest money manager in the world saw its assets under management surge 22 percent in 2017, bringing the total to $6.288 trillion.