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Goldman Sachs sees these high-quality stocks as the market leaders in 2019

Key Points
  • Goldman Sachs is recommending high-quality companies with strong balance sheets during a year that could see a broad market gain of 20 percent.
  • Investors have discounted too much of an economic slowdown, the firm believes.
  • Among its recommendations are FedEx, IBM and Walgreens.

High-quality companies with low debt loads will pace a stock market set for a substantial gain in 2019, according to Goldman Sachs strategists.

The firm is recommending a basket of stocks led by economic bellwethers FedEx and UPS and core industrial company IBM as part of a strategy to "increase portfolio defensiveness."

In the big picture, Goldman sees the ending the year at 3,000, implying an 18.5 percent gain from Friday's close after a year that saw the large-cap barometer fall 6.2 percent. The firm believes investors are overly pessimistic about the growth potential for the U.S. economy, even though Goldman projects GDP rising just 1.9 percent for the year.

"The low starting level and valuation of the market suggest positive returns to US equities in the coming year," wrote David Kostin, Goldman's chief U.S. equity strategist. "Our baseline forecast is that the US economic expansion continues and that 6% EPS growth combined with multiple re-rating to 16x will lift the S&P 500 to 3000 by year-end."

Goldman: US growth will slow next year, but fundamentals remain strong

Stocks currently are trading around 15 times earnings after starting 2018 with an 18 multiple. Worries about higher interest rates, U.S.-China trade tensions and the pace of Federal Reserve interest rate hikes shook the market through the year, with the volatility climaxing in a late-year flirtation with a bear market.

Investors also are concerned that a global economic slowdown also could infect the U.S., which is coming off its best year of a recovery that began in mid-2009. GDP averaged 3.2 percent in the first three quarters and is expected to come in around 2.9 percent for the fourth quarter, according to the CNBC Rapid Update tracker.

Kostin pointed out that S&P 500 returns have been positive 81 percent of the time since 1930 when GDP growth retreats by less than 2 percentage points.

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"Positive headlines around trade discussions with China and dovish Fed commentary would provide near-term relief to equity market uncertainty and represent a potential catalyst for higher equity prices," he said. "Stabilization in economic data, both in the US and abroad, could also lift investors' confidence regarding the longevity of the current expansion, which in July will mark its 10th anniversary (the longest since at least 1850)."

Goldman recommends investors up their cash allocations, which are around 30-year lows, as equivalents like three-month Treasury bills now provide healthy yields.

In addition, the firm is recommending stocks that combine quality with strong balance sheets, a group it said has outperformed since Dec. 3 during the worst of the market sell-off.

"We believe these stocks will be of particular interest to equity investors seeking stability and relatively limited downside," Kostin wrote.

Along with the above-mentioned companies, the basket's top names also include KLA-Tencor, Walgreens Boots Alliance, Essex Property Trust, AmerisourceBergen and Tyson Foods.