Jacob Sonenshine

Economic uncertainty is rising, and finding winning stocks will be more difficult for investors. Citi strategists identified a handful of growth names that could power through any turbulence.

Economic growth has been slowing down. Tariffs only worsen the economy. Companies have already reported rising costs as a result, and some are beginning to implement further price increases, which brings about the threat of more inflation, still-elevated interest rates, and waning consumer demand.

That puts the stock market at risk. The S&P 500 has erased losses since early April when President Donald Trump announced tariffs. The index is only 2.5% away from reclaiming its record high. The S&P 500 now trades at almost 22 times aggregate earnings that analysts forecast for the coming 12 months, the high end of its range in the past three years. Simply put, if the economy weakens too much and earnings come in lower than currently expected, the index has nowhere to go but lower.

That's why Citi's Scott Chronert updated his screen of growth stocks that have a solid chance of rising, even amid all the investor worry.

To make the screen, a stock had to be among the lowest in terms of its correlation to macroeconomic surprises. Basically, when economic data come in worse than expected, these stocks don't drop nearly as much as most do.

Relatedly, companies that pass the screen must also have resilient sales growth expectations, meaning that they have analyst forecasts that call for steady or rising growth beyond this year. Many companies in the major indexes -- including some big tech names -- see slowing growth for the next few years. But some companies are benefiting so much from their customers' increasing reliance on their goods and services, that they can grow revenue aggressively, even if broader spending slows down. These winners include firms selling equipment and software for artificial intelligence, digital-payment technologies, and online-shopping services.

Sales growth provides a foundation for looking for the right names, but they also need to operate efficiently enough to also show aggressive profit growth. Strong operating leverage facilitates that, and winners would see outsize earnings growth from sales growth.

Lastly, making the shortlist meant not trading too expensively. Many of them have strong so-called PEG ratios -- price/earnings divided by earnings growth -- of below 1.8 times, versus about 1.8 times for large tech stocks in the S&P 500. Having a PEG ratio below that means investors are paying less for every percent of expected earnings growth.

Citi's screen is one of the most thorough on Wall Street, and it includes Aamzon.com, Alphabet, Uber Technologies, DoorDash, Mastercard, DraftKings, and semiconductor-equipment maker Applied Materials.

The screen also turned up Pinterest. The product-sharing platform looks positioned to reaccelerate sales growth, which analysts expect to come in at 16% to $4.82 billion in 2026 from 14% this year, according to FactSet. Pinterest is increasing the number of advertisements on its website, while also still attracting more users, of which it has hundreds of millions today. The users are potential buyers, and Pinterest is using artificial intelligence to show each user the right ads, drive purchases, and increase the return that advertisers earn by marketing on the platform.

That's why the still-small Pinterest -- with a market capitalization of $23 billion -- can grow aggressively as the global digital ad market totals hundreds of billions of dollars annually.

Growing has come without ballooning costs. Pinterest has increased margins in recent years, and analysts expect more of the same, forecasting 24% annual earnings growth over the coming three years.

That makes its 18 times price/earnings ratio look cheap, since it equates to a PEG ratio of 0.75 times.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

June 05, 2025 13:33 ET (17:33 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.