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The “Rule of 10” for Deciphering the Next Stock Market Champions
Choosing growth stocks with the best upside potential can be a challenging task for investors. Everyone wants to discover the next big winners in the stock market, but how do you identify these companies? Goldman Sachs Group, Inc. (GS) has a unique and surprisingly straightforward approach to identifying potential winners: they look for businesses that can consistently increase their revenues by at least 10%. This strategy, known as the “Rule of 10,” has proven to be quite successful, with 21 S&P 500 firms meeting the criteria in early 2025.
Goldman Sachs developed the “Rule of 10” as a way to spot the next wave of equities that are ready to soar in value. According to this rule, companies must demonstrate a consistent sales growth of 10% and be able to sustain this growth in the future in order to pass the test. By applying this rule, Goldman Sachs has identified 21 S&P 500 stocks that meet their income requirements in 2025. However, it is important to note that while this stock screen provides valuable insights, it should not be the sole factor guiding investment decisions.
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Analysing what made today’s biggest winners, such as Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), and Apple Inc. (AAPL), successful can provide valuable insights into identifying potential outperformers in the stock market. By understanding the key factors that contributed to their success, analysts at Goldman Sachs can create a screen to identify future engines of stock market growth.
To meet the criteria of the Rule of 10, companies must:
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– Be listed on the S&P 500 Index
– Have experienced at least 10% revenue growth in each of the last two years
– Be projected to increase revenues by at least 10% in the current year and the two fiscal years following it
By screening the S&P 500 for firms with at least 10% revenue growth in the previous years, Goldman Sachs is able to identify stocks that have the potential to outperform the market in the coming years.
While the specific stocks that meet the Rule of 10 criteria may vary as analysts revise their estimates of income growth, investors can use screening tools to identify stocks that are likely to outperform the market based on Goldman Sachs’ criteria.
It is important to note that while some popular companies may just miss out on meeting the Rule of 10 criteria, the focus should be on identifying stocks that have the potential for maximum capital appreciation based on historical and future revenues. The Rule of 10 is intended to serve as a starting point for investment ideas rather than a definitive list for immediate investment decisions.
In conclusion, the Rule of 10 provides investors with a framework for identifying potential winners in the stock market. By focusing on companies that demonstrate consistent revenue growth, investors can position themselves to benefit from the next wave of S&P 500 stocks that are poised for growth.
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