GOLDMAN SACHS: The boost companies got from tax reform is on its last legs - here are the 14 stocks best built to surge even as it fades

REUTERS

• The GOP tax plan has been a major boon for stocks, which have seen their profit forecasts adjusted upward throughout 2018. But all good things must come to an end.
• Goldman Sachs has identified the 14 stocks best positioned to outperform their peers even as the positive effect of tax reform wanes.

The GOP tax law has given an undeniable boost to corporate earnings-growth expectations. But what happens after the initial high wears off?

We're about to find out, says Goldman Sachs, whose 2019 forecasts for S&P 500 profit expansion have stayed unchanged even as 2018 estimates have skyrocketed.

That's because Goldman, like much of Wall Street, realizes that the shot in the arm companies received from tax reform is a one-time deal. It's been great while it's lasted, but the firm says it's time to consider what the future holds.

For Goldman, the best course of action for traders is to identify the stocks positioned to outperform even as the positive effect of tax reform fades. And it's done the dirty work for you.

Before we get into their stock picks, consider the firm's methodology, which is centered around margins. Goldman targets companies boasting high, stable gross margins that have shown no recent weakness. And those firms just so happen to have beaten their weak-margin peers by roughly 900 basis points year-to-date.

"As the margin tailwind from tax reform passes, firms with the ability to sustain or grow profit margins will become increasingly scarce and should be rewarded by investors," a group of Goldman strategists led by Ben Snider wrote in a client note. "The market typically rewards companies with high margins when the outlook for corporate profitability weakens."

Without further ado, here are the 14 stocks in the Russell 1000 index best positioned to withstand the fading effect of tax reform, due to their high and stable gross margins. They're arranged in decreasing order of trailing one-year gross margin change.

Get the latest Goldman Sachs stock price here.