Goldman expects profit margins to jump next year and these stocks to benefit most

Published Mon, Oct 5 202010:42 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). A continued economic recovery in the fourth quarter and into 2021 should lead to a snapback in a key financial metric, Goldman Sachs said in a note to clients. The firm said in a note that 10 out of 11 S & P 500 sectors saw return on equity decline this year, but the numbers should bounce back once revenues return. Goldman released a list of stocks that are best positioned for significant growth in the metric, which is a measure of earnings growth, in the next 12 months. "We expect S & P 500 net margins will sharply rebound by 181 bp to 10.9% in 2021, slightly below 2019 levels. This forecast primarily reflects our economists' expectation of strong US and world GDP growth in the coming year, driven in part by vaccine approval and distribution," the note said. Goldman noted that cost-cutting during the pandemic and automation will help boost the margin recovery. One of the stocks with the largest projected return on equity growth was Chipotle Mexican Grill . The stock has outperformed the market so far this year, and Goldman projects its return on equity to rise by 39% over the next 12 months. Other stocks on the list have been significant underperformers so far this year. Apparel stock Tapestry and Discover Financial Services have fallen 40% and 28% year to date. Discover is also tied with a few real estate stocks for the highest projected return on equity growth at 45%, according to Goldman Sachs. Also near the top of the list for projected growth is Align Technology . The dental device company was hit hard by the economic restrictions caused by the pandemic, with sales down about 40% year-over-year in its spring quarter. Shares of Align have still managed to gain more than 12% year to date. One risk to a rebound for earnings is the prospect of higher corporate taxes if Democrats take control in Washington. However, Goldman said that it does not expect that to impact the 2021 bottom lines. "Our political economist believes the bill would likely would be pared down and new taxes would be phased in starting in 2022. As a result, we estimate that the boost from fiscal stimulus and reduced tariffs would more than offset the expected tax policies in 2021 and 2022, before the policies become a modest net earnings drag in 2023 and 2024," the note said.

A pedestrian wearing a face mask looks at a smartphone while passing in front of the New York Stock Exchange (NYSE) in New York, on Monday, July 20, 2020.

Michael Nagle | Bloomberg | Getty Images

(This story is for CNBC Pro subscribers only).

A continued economic recovery in the fourth quarter and into 2021 should lead to a snapback in a key financial metric, Goldman Sachs said in a note to clients.

The firm said in a note that 10 out of 11 S&P 500 sectors saw return on equity decline this year, but the numbers should bounce back once revenues return. Goldman released a list of stocks that are best positioned for significant growth in the metric, which is a measure of earnings growth, in the next 12 months.

"We expect S&P 500 net margins will sharply rebound by 181 bp to 10.9% in 2021, slightly below 2019 levels. This forecast primarily reflects our economists' expectation of strong US and world GDP growth in the coming year, driven in part by vaccine approval and distribution," the note said.

Goldman noted that cost-cutting during the pandemic and automation will help boost the margin recovery.