Goldman Sachs: What investors should buy, depending on which way the trade war swings

• If trade tensions continue to rise and new tariffs are implemented, stocks with the highest domestic sales exposure in the U.S. should outperform, said a Goldman Sachs report.
• If tensions should moderate, however, then investors should look at S&P 500 stocks with over 10 percent revenue or asset exposure to Greater China, the bank said.

A worker transporting steel cables at a steel factory in Nantong, China. 

AFP | Getty Images

If the U.S.-China trade war escalates, investors should be betting on domestic-focused U.S. stocks, according to Goldman Sachs.

If the tensions ease, however, China-exposed companies would likely outperform, the bank said in a report released Tuesday. The Goldman Sachs analysis highlighted S&P 500 companies that have notable levels of revenue or asset exposure to the China.

"If trade tensions continue to rise and new tariffs are proposed and implemented, stocks with the highest domestic sales exposure should outperform," said the report, which was authored by Goldman chief U.S. equity strategist David Kostin and others from the bank.

If tensions moderate, then investors should look at stocks with over 10 percent revenue or asset exposure to Greater China, Goldman said. Those companies with significant Chinese sales are "at risk from continued escalation of the trade war," and most are concentrated in the information technology sector, specifically semiconductors and related equipment, the bank said.

In 2017, companies in the S&P 500 index derived 30 percent of their revenues from international sources — including 8 percent of the total from Asia Pacific and 10 percent from Europe. The information technology sector has the highest international revenue exposure at 60 percent, followed by the materials sector at 49 percent, the report said.

According to Goldman, some of the companies with the highest sales exposure to Greater China include:

• Information technology sector: Skyworks Solutions (84 percent), Qualcomm (65 percent), Micron Technology (64 percent), Texas Instruments (44 percent), Intel (40 percent), Apple (20 percent).
• Consumer sector: Wynn Resorts (73 percent), MGM Resorts (19 percent), Boeing (13 percent), Nike (12 percent).
• Health-care sector: Agilent Technologies (20 percent), PerkinElmer (17 percent).

"Top-line growth for these firms will likely come under pressure if China imposes retaliatory tariffs. Such tariffs would drive up the price paid by consumers in Greater China," the report said, referring to the region that includes mainland China, Taiwan, and special administrative regions like Hong Kong.

For investors looking out for S&P stocks with the highest domestic revenue exposure, those would be mostly in the telecommunications, consumer, financials and health-care sectors, according to the report.

Those include:

• Consumer sector: Dollar General, Target.
• Financials sector: Charles Schwab, Wells Fargo, SunTrust Banks.
• Telecommunications services and utilities sectors: Verizon, Dominion Energy.

"The most domestic-facing stocks typically outperform as US growth strengthens relative to the rest of the world. The recent trend of stronger US GDP growth has helped domestic-facing stocks outperform foreign-facing stocks," the report added.

On July 6, U.S. tariffs on $34 billion of Chinese products took effect, and China retaliated with duties on the same value of American goods. Following this, the Trump administration said it was preparing possible tariffs on $200 billion more in Chinese goods.