Fewer Quality Stocks Showcasing Profitability Improvements, Finds Citi Research
Identifying companies with robust returns is becoming increasingly challenging, according to a recent analysis by Citi Research. Return on equity (ROE)—a key indicator of profitability calculated by dividing net income by shareholders’ equity—is showing signs of scarcity among many large-cap stocks.
Scott Chronert, Citi’s U.S. equity strategist, noted that stocks expecting ROE growth driven by margin expansion or improved total asset turnover are now rarer within the S&P 500. This trend stems largely from subdued macroeconomic forecasts and ongoing trade uncertainties.
Positive ROE Trend Basket Shrinks Amid Market Uncertainty
Citi's latest rebalancing of its “Positive ROE Trend” stock basket — which includes companies anticipated to strengthen profitability metrics — contains only 90 names this quarter, down from over 100 in previous updates. Despite this contraction, Chronert highlighted that stocks in this cohort have continued to outperform those with negative ROE trends, even throughout recent market downturns and recoveries.
Interestingly, these better-performing groups remain fairly valued, suggesting investors are recognizing their growth potential without overpaying.
Top Stocks Expected to Lead in ROE Growth by 2026
Among the companies spotlighted by Citi:
- Lockheed Martin is forecasted to lead all S&P 500 firms with an ROE surging from 9.6% today to an impressive 93.9% by the end of 2026. The defense giant remains confident amid strong demand for missile systems and fighter jets, highlighted by increased defense budgets in the U.S. and Europe. The company’s COO described this period as the start of a three- to five-year surge in defense spending.
- Tapestry, the luxury brand owner behind Coach and Kate Spade, is projected to hit a robust 61.4% ROE next year. The company has gained momentum with shares up nearly 28% this year and benefits from Wall Street’s renewed enthusiasm over its multiyear growth story.
- Ralph Lauren also boasts promising profitability, with an expected ROE of 31.9% in the coming year.
- Other notable names include Broadcom and Chipotle Mexican Grill, both forecasted to exceed a remarkable 43% ROE by 2026, signaling strong operational efficiency and margin improvements. Broadcom’s stock has climbed approximately 51% this quarter, fueled by sustained demand for its AI-focused semiconductors and networking products.
- Netflix continues to be singled out for its potential profit growth, reflecting ongoing confidence in its business model and content strategy.
What This Means for Investors
The shrinking pool of companies expected to improve ROE highlights the challenges in finding stocks with sustainable profit growth amid macroeconomic headwinds. However, Citi’s positive ROE basket demonstrates that targeted, quality names still exist and can outperform the broader market.
Investors seeking to capitalize on these trends might consider focusing on companies with clear drivers for margin expansion and asset efficiency — such as those involved in defense, luxury retail, technology, and consumer staples — especially given current valuation levels.
