GOLDMAN: Stocks will go nowhere in 2016

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".

It won't be much different for the economy. Goldman is calling for GDP growth of 2.2% for the next two years.

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.