Citi recommends these rare stocks that will show profitability gains this year

Citi Research reports that companies with improving Return on Equity (ROE) are becoming increasingly scarce within the S&P 500 due to macroeconomic headwinds and trade concerns, as evidenced by a decrease in the number of stocks meeting the criteria for Citi's "Positive ROE Trend" basket. Despite this scarcity, the "Positive ROE Trend" basket continues to outperform, with Lockheed Martin, Tapestry, Ralph Lauren, Netflix, Broadcom, and Chipotle highlighted as companies expected to deliver strong ROE in the coming years; Lockheed Martin, in particular, is projected to have a 93.90% ROE by the end of 2026 amid rising defense spending.

Analysis

Citi Research highlights an increasing scarcity of S&P 500 companies exhibiting improving Return on Equity (ROE), primarily due to downgraded outlooks stemming from softer macroeconomic conditions and trade concerns. This trend is evidenced by a reduction in constituents in Citi's "Positive ROE Trend" stock basket, which now includes only 90 names compared to over 100 in previous rebalances. Despite this, the basket, which screens for companies expected to achieve ROE gains through margin expansion or enhanced total asset turnover, has persistently outperformed its "Negative ROE Trend" counterpart through recent market drawdowns and recoveries, while maintaining justifiable valuations. Among the highlighted companies, Lockheed Martin (LMT) is projected by Citi to achieve the highest ROE in the S&P 500, with an estimated 93.90% by the end of 2026, up from a current 9.6%, supported by resilient demand for its defense systems and a potential 3-to-5 year surge in defense spending. Retailers Tapestry (TPR) and Ralph Lauren (RL) are also noted for strong projected ROEs next year of 61.4% and 31.9%, respectively; Tapestry shares have gained nearly 28% year-to-date, buoyed by analyst upgrades and a positive outlook for its Coach brand. Broadcom (AVGO) and Chipotle Mexican Grill (CMG) are anticipated to see ROEs exceed 43% by the end of 2026, with Broadcom's AI revenue growth expected to sustain into fiscal 2026, driving its stock up approximately 51% this quarter. Netflix (NFLX) is also included among companies expected to deliver strong future profits.

Key Decisions for Investors

• Investors should intensify focus on identifying companies with clear drivers for ROE improvement, such as margin expansion or asset turnover gains, given their increasing rarity in the S&P 500.
• Consider overweighting high-quality stocks with positive ROE trends, as evidenced by the historical outperformance and justifiable valuations of Citi's screened basket, particularly in volatile market environments.
• Evaluate opportunities in sectors with structural tailwinds supporting ROE growth, such as defense (e.g., LMT) benefiting from increased global spending, and technology (e.g., AVGO) driven by sustained AI demand.
• Selectively explore resilient consumer discretionary names (e.g., TPR, RL) that demonstrate strong brand power and multiyear growth outlooks capable of delivering robust ROE despite broader economic uncertainties.