GOLDMAN SACHS: Equity traders are expecting an economic acceleration - and these 12 stocks are best positioned to skyrocket as conditions improve

Reuters / Kyodo

• David Kostin, Goldman Sachs' chief US equity strategist, says investors are getting more optimistic about the US economy and are shifting money into cyclical stocks as a result.
• But he says that rotation has been uneven, and thinks there are some discounted stocks that could register big gains if that economic improvement materializes.
• Kostin is looking at stocks that will have better earnings acceleration and have the potential for larger price gains than the broader market.
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When the stock market turns slowly, sharp-eyed investors can find opportunities.

David Kostin, the chief US equity strategist at Goldman Sachs, says he sees signs traders are getting more optimistic about the domestic economy. That's led to gains for cyclical stocks like banks and tech hardware companies and a shift away from more defensive equities.

To him, these conditions have created a distinct set of investment possibilities.

"The relative performance of Cyclicals vs. Defensives suggests the equity market is anticipating an acceleration in US economic growth during the coming months," he said. "Although the equity market has started to price an acceleration in US economic growth, we believe the recent rotation has room to run."

He names four factors that can contribute to that acceleration: (1) The recent batch of interest rate cuts by the Federal Reserve, (2) the fact that US-China tariffs shouldn't get any worse, (3) growth in inventories for US companies, and (4) the removal of some one-time obstacles like the GM workers' strike.

But as that shift occurs, many cyclical stocks are being left behind, and Kostin says some of them will catch up if those signs of economic improvement continue. That would lead to powerful performance in the months ahead.

The key to that combination, he says, is finding companies that will do more business as the economy improves, but whose stocks trade at depressed valuations compared to their recent histories.

For that reason, Kostin is zeroing in on sectors more exposed to the economic cycle. He's leaving out energy companies because doubts there will be much improvement in energy prices, and also omitting chipmakers, which have recently rallied.

Investors who want broad exposure to the theme of an improving economy can get it through ETFs including the SPDR S&P Bank ETF and the SPDR Industrial Select Sector ETF.

The result of Kostin's evaluation is a group of companies that actually have slightly slower earnings growth than the broad Russell 1000 index - but which will have a much bigger relative improvement in 2020 than their peers.

The stocks below are ranked in increasing order based on the difference between their historic next-12-month price-to-earnings ratio and their current P/E ratios. The larger the number, the more the stock could rally.

Get the latest Goldman Sachs stock price here.