Stocks have extended their winning ways of 2017 into the new year – with the S&P 500 returning 3.5% through last week, its strongest start in 16 years, according to Goldman Sachs (NYSE:GS). In a research note, Goldman said it expects the S&P 500 will rise to 2850 by year end, and recommends investors overweight the financials and industrials sectors.
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Overall, Goldman analysts say the financials should benefit from tax reform, deregulation, capital return and rising interest rates. Technological innovation should help insurance companies outperform in 2018.
Their top picks in the financials are the large cap banks—Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC); regional banks Comerica Incorporated (NYSE:CMA) and Regions Financial Corp. (NYSE:RF); consumer finance bank Capital One Financial (NYSE:COF); and insurance companies Metlife (NYSE:MET) and Progressive (NYSE:PGR).
Goldman analysts believe industrials should benefit from strong U.S. and global economic activity as well as tax reform, and they expect significant upside in machinery and defense stocks.
Goldman analysts Jerry Revich and team are positive on machinery stocks as the industry continues to emerge from a cycle trough. Caterpillar (NYSE:CAT) and Deere (NYSE:DE) will likely benefit from strong operating leverage, with Caterpillar beginning to reap the benefits of its investments in facility productivity and lower costs.
Goldman also expects defense stocks will outperform again in 2018 with growth exceeding expectations. Within the defense sector, Goldman’s top picks are Northrop Grumman Corporation (NYSE:NOC) and L3 Technologies Inc. (NYSE:LLL).