Goldman Sachs is forecasting another lackluster year for the S&P 500.
Year-to-date, the benchmark index has gained about 1.3%.
“We forecast the S&P 500 index will tread water for a second consecutive year in 2016,” Goldman’s David Kostin wrote in the firm’s 2016 stock-market outlook on Tuesday.
“Our year-end 2016 target of 2100 represents a 1% price gain from the current index level (2089), which itself is just 1% above the year-end 2014 level of 2059. Including dividends, we expect the total return in 2016 will equal 3%.”
This low-return environment will persist as stock valuations remain relatively high. Kostin sees the price-to-earnings ratio at 16.2 times earnings next year, compared to an estimated 16.6x this year.
Apart from the big dips in August and September, it’s been a sideways year for the market this year. And, borrowing from the words of late New York Yankees legend Yogi Berra, Kostin says 2016 would be “déjà vu all over again”.
S&P 500 earnings will grow by 10% to $120, Kostin forecasts, but there’s a catch. Because energy companies had such bad year, with profits plunging 80% due to the fall in oil prices, they have a low bar to clear next year.
And so, unlike in 2015, the energy sector could actually be a real boost for S&P 500 earnings growth next year.
Kostin further identified three big themes that would dominate the market next year.
- S&P 500 returns would be weak, but there’s still lots of opportunity. For example, amid a strong dollar, stock with high US sales will outperform those very exposed internationally, according to Kostin.
- Higher rates, initiated by the likely first rate hike in December that Goldman forecast back in June. However, Goldman sees just a 100 basis-point increase in rates next year, compared to the futures market’s implied forecast for 60 basis points of tightening. In a higher-rate environment, companies with strong balance sheets would outperform those with weak balance sheets, Kostin says.
- Margins would stay flat during 2016 and 2017, at 9.1%, partly due to higher labor costs that include healthcare and wages.
SEE ALSO: Top Wall Street bull explains how stocks can rally another 10% from here through 2016
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