Goldman Sachs sees three major 2021 investing themes continuing this year

Published Mon, Jan 10 202210:05 AM EST

Goldman Sachs believes three investing themes from 2021 will continue to be driving forces in the new year, including threats to corporate earnings from inflation and the pandemic. The Wall Street firm identified three themes that it thinks investors should focus on in the fourth-quarter reporting season and into 2022: growth threats from Covid-19 variants, margin pressures from input cost inflation and potential tax reform. In this environment, Goldman said stocks with pricing power should beat the market. Growth threats from Covid The first big risk stems from the ongoing Covid pandemic, Goldman said. "The Omicron variant has introduced new risks to economic activity given its heightened transmissibility and drag on reopening," Goldman chief U.S. equity strategist David Kostin said in a note. Goldman economists recently slashed their GDP growth forecasts to 3.5% from 4.2% in part due to the effects of the Omicron variant on the economy. Goldman said each one percentage point of change in GDP growth would translate into roughly $7 of S & P 500 earnings per share. Margin Pressures Secondly, Goldman believes persistent labor market tightness will make expanding margins an uphill battle for companies in 2022. "In earnings calls as recent as 3Q, managements bemoaned historic worker shortages, particularly for low-wage jobs in the services sector," Kostin said. "Our economists expect the rapid pace of wage inflation to subside to around 4%, but this could take several quarters to achieve." Goldman said firms with high labor costs or exposure to wage inflation will face the most difficulty in preserving margins. Tax reform Finally, the passage of President Biden's Build Back Better bill would have mixed implications for stocks, Goldman said. Biden issued a $1.75 trillion social and climate spending plan late last year . About $1 trillion would be financed by higher taxes on wealthy Americans. The Build Back Better proposal would levy a tax surcharge on Americans who earn more than $10 million, invest in more IRS enforcement and raise taxes for some business owners. However, Senator Joe Manchin has rejected the draft legislation. In the event that the legislation is adopted this year, Goldman estimated this tax reform would reduce S & P 500 EPS by 2% to 3% relative to current tax policy. Companies with high pricing power Goldman is recommending clients to buy companies with high pricing power in the face of margin pressures. The Wall Street firm said companies with high and stable gross margins have outperformed those with weak and variable margins by 12 percentage points since the beginning of the fourth quarter of 2021. Goldman screened Russell 1000 for stocks with high and stable gross margins during the last five years. The list of names include a few retail names, including Tapestry and PVH , as well as some consumer staple stocks like Philip Morris and Colgate-Palmolive . A slew of tech stocks were also highlighted by Goldman, including Adobe, Aspen Technology and Dolby Laboratories.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Dec. 31, 2021. U.S.

Michael Nagle | Bloomberg | Getty Images

Goldman Sachs believes three investing themes from 2021 will continue to be driving forces in the new year, including threats to corporate earnings from inflation and the pandemic.