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Stock-market volatility has been relatively low so far in 2023, but may rise in the second half.
Goldman Sachs has newly identified 39 stocks that offer high returns relative to their risk.
They expect the median stock in their basket to nearly triple the median S&P 500 name.
The S&P 500 had rallied 13% year-to-date as of Tuesday.
But a few things stood out about the rally. It wasn't a broad swath of stocks that drove the uptrend: a handful of mega technology names pulled the entire index up as they gained.
Also, the rally took place with relatively low levels of volatility, as measured by the Cboe Volatility Index (VIX). The VIX spiked during the regional banking crisis in March, but has since fallen below 13, its lowest level since before the pandemic.
Moving forward, that low-volatility environment may change, and it would help stocks with the highest prospective risk-adjusted returns outperform the S&P 500, said David Kostin, the chief US equity strategist at Goldman Sachs, in a recent note.
These stocks are identified through their Sharpe ratios, a metric that helps investors gauge whether the risk they've taken in an investment has paid off in returns, compared to what they would have earned in a zero-risk alternative like Treasuries. A higher Sharpe ratio means the investment offers more returns relative to its risk.
Goldman's stock picks are contained in its recently rebalanced High Sharpe Ratio basket (GSTHSHRP). Kostin noted that its returns have historically been correlated with value stocks. And because the latter underperformed in the first half of the year, the basket did, too.
The forward-looking list, which adds 39 stocks, doesn't include the typically growth-oriented, mega-tech names that have carried the market in 2023. Yet, Kostin and his team expect the median stock in their basket to outperform the median S&P 500 member by nearly three times, or gains of 32% versus 11%, in the next 12 months without a significant increase in volatility.
However, they warn that if the narrow, tech-led rally continues, this new list may perform differently than expected.
Below is a list of the 39 stocks recently added to the High Sharpe Ratio basket. Each stock includes its forecasted price-to-earnings ratio for the next 12 months, the upside or downside to its price target, its six-month implied volatility, and the expected return ratio relative to that volatility.
