The S&P 500 will likely "tread water" in 2016 -- for the second year in a row, according to Goldman Sachs.
The investment firm projects that the S&P 500 will end 2016 at 2100 -- a mere 1% gain from the S&P's current level of 2089. Including dividends, Goldman Sachs expects the total return will equal 3% next year.
So what does that mean for stock picking? In 2016, themes that will dominate the markets include higher interest rates as the Federal Reserve is widely expected to raise the federal funds rate for the first time in nine years at its December 16 meeting. Equity investors should consider companies with strong balance sheets that will outperform those with weak balance sheets, Goldman says.
The market will also be divided next year. "The S&P 500 index will be flat in 2016, but differentiated performance will occur along clear lines," the note said.
"Divergent monetary policies (Fed tightening vs. [European Central Bank] and [Bank of Japan] easing) will strengthen the U.S. dollar and benefit some stocks and harm others. The domestic consumer economy is strong but many industrial companies cite a contraction in business activity. Growth equities are outperforming value which is a pattern that occurs when economic growth is weak. Cyclicals have lagged sharply led by Energy and Materials but defensive sectors trade at stretched valuations," Goldman said.
As a result, stocks with high sales in the U.S. will outperform those with significant international sales. As well "growth should outperform value given muted economic growth," the note said.
Goldman analysts prefer mega-cap stocks (those as part of the S&P 100). "In addition, mega-cap stocks (constituents in the S&P 100 index) should continue to outperform in the current environment of narrow market breadth," the note said.
Finally, companies that are able to drive margin growth will outperform those that cannot. "Given rising labor and health care costs, firms in most industries will struggle to simply maintain margins," the note said. "Investors will reward firms able to demonstrate a path to higher sales and margins."
The Goldman analysts listed 35 S&P 500 stocks that currently meet at least two of this recommended investment criteria, i.e., strong balance sheets, high U.S. sales, Goldman Sachs analysts' projections of at least 50 basis points of margin expansion in 2016 and 2017 and revenue growth greater than nominal U.S. GDP growth (roughly 4%) and a part of the S&P 100.
Here's the list, along with ratings from TheStreet Ratings for additional perspective. To be sure, not all of the stocks have "buy" ratings by Goldman Sachs.
TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on Nov. 23 closing prices.AMZN data by YCharts
1. Amazon.com (AMZN)
Industry: Consumer Goods & Services/Internet Retail
Year-to-date return: 119%
Goldman Sachs Rating/Price Target: Buy, $760
2016 Recommended Investment Criteria Buckets: margin expansion of at least 50 basis points in 2016 and 2017, part of the S&P 100
TheStreet Said: TheStreet Ratings team rates AMAZON.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the company's return on equity has been disappointing.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Internet & Catalog Retail industry average. The net income increased by 118.1% when compared to the same quarter one year prior, rising from -$437.00 million to $79.00 million.
- AMZN's revenue growth trails the industry average of 38.3%. Since the same quarter one year prior, revenues rose by 23.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
- AMAZON.COM INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AMAZON.COM INC swung to a loss, reporting -$0.54 versus $0.58 in the prior year. This year, the market expects an improvement in earnings ($1.92 versus -$0.54).
- Powered by its strong earnings growth of 117.89% and other important driving factors, this stock has surged by 102.50% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, however, we cannot assume that the stock's past performance is going to drive future results. Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Internet & Catalog Retail industry and the overall market on the basis of return on equity, AMAZON.COM INC underperformed against that of the industry average and is significantly less than that of the S&P 500.
- You can view the full analysis from the report here: AMZN