Market Forecast for 2016: Stocks to Return 8%

Don’t give up on the bull market yet.

But as the bull heads for its eighth year, investors must cope with heightened volatility in one of the trickiest investing climates in years, with the Federal Reserve nudging up interest rates, corporate profits growing tepidly, price-earnings ratios unlikely to expand and political rhetoric boiling over.

So what can investors expect in 2016, on average? Stock prices will appreciate moderately, in mid-single-digit percentages over the next year, commensurate with modest gains in corporate earnings. That would put the Standard & Poor’s 500 stock index approaching 2,200 and the Dow Jones approaching 19,000. Including two percentage points of dividend yield, we look for U.S. stocks to return roughly 8%.

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The key to market gains next year: A revival of corporate profits. Earnings growth will tally near zero for 2015 when the counting is done. Sales growth, the Godot of America, has yet to materialize in any big way. We think earnings will grow 6% to 8% on average over the course of 2016.

There’s still plenty to worry about, of course:

• The shaky global economy is a concern, particularly with China morphing from a rapidly growing manufacturing economy to a slower-growing, consumer-driven one.
• There’s also our own U.S. economy to fret about. We expect it will strengthen in 2016, albeit only modestly.
• And a geopolitical or economic shock could derail the stock market.
• A more banal possibility: Downward revisions in growth expectations, little by little.

All in all, we continue to think that the weight of the evidence favors the bull.

Stocks to Consider in 2016

Among stocks to consider in a world of slow economic growth:

• Companies with stellar finances and stable earnings, which can take volatility. Think CVS Health (CVS), supermarket giant Kroger (KR), and apparel maker VF Corp (VFC).
• Firms that make and market nonessential goods. One way to invest in them is through Consumer Discretionary Select Sector SPDR (XLY), an exchange-traded fund.
• Technology stocks. They’re good performers, and they remain well-priced, given growth prospects for highfliers such as Alphabet (GOOGL) (the ex-Google) and Facebook (FB) and below-average valuations for “old tech” such as Intel (INTC) and Cisco Systems (CSCO). Fund investors can find many leaders in the T. Rowe Price Global Technology Fund (PRGTX).

Income investors will in many cases do better with stocks than with bonds as interest rates rise and bond prices, which move in the opposite direction, fall. A solid choice for investors to consider: Vanguard Dividend Growth Fund (VDIGX).