The U.S. dollar is on steroids, and it’s not getting off them any time soon.
Sounds great for America, but it’s a problem for stocks, and it’s one of the reasons Goldman Sachs thinks the market will barely budge in 2016.
The strong dollar can pressure stocks in two ways: It makes American products more expensive overseas, so big U.S. multinationals have a tough time competing. And what international profit they do make is worth less when converted into dollars.
The dollar has been on a tear thanks to the relatively good U.S. economy and increasing signs the Federal Reserve will finally raise interest rates. The greenback is rapidly approaching parity with the euro. (One euro is currently worth $1.06.)
Goldman has advised clients to buy large U.S. companies that generate the vast majority of their sales at home.
“Divergent monetary policies (Fed tightening vs. ECB and BOJ easing) will strengthen the U.S. dollar and benefit some stocks and harm others,” Goldman wrote in a recent report.
The “strong dollar regime” means stocks with high U.S. sales will outperform those with high international sales, the report said.
Goldman scoured the investing universe and identified six stocks it has blessed with “buy” ratings that have little exposure to foreign markets. These stocks also meet at least one of the firm’s other 2016 recommended investment criteria: Strong balance sheets to withstand higher rates, projected growth in profit margin and mega-cap status.
Stock performance in 2015: -15%
Projected 2016 earnings growth: 18%
Stock performance in 2015: +12.5%
Projected 2016 earnings growth: 19%
3. Marathon Petroleum (MPC)
Stock performance in 2015: +30%
Projected 2016 earnings growth: -14%
4. Cognizant Tech Solutions(CTSH)
Stock performance in 2015: +23.5%
Projected 2016 earnings growth: 15%
5. Vulcan Materials (VMC)
Stock performance in 2015: +58%
Projected 2016 earnings growth: +77%
Stock performance in 2015: -3%
Projected 2016 earnings growth: 1%
One of the other major themes likely to drive stocks in 2016 is the pressure on profits from higher employee costs. It’s the flipside to the minimum wage hike announcements made in recent months by the likes of McDonald’s(MCD) and Wal-Mart(WMT).
Wage growth is finally showing signs of life, with average hourly earnings jumping in October by 2.5% — the biggest increase since 2009. Get ready to hear more details on Americans getting a raise when the November jobs report is published on Friday.
Higher wages mean consumers have more money to spend when they shop for the holidays. But the higher salaries also eat into companies’ bottom lines. It’s a big reason why Goldman thinks S&P 500 net profit margins will flatline next year and in 2017.
“Given rising labor and healthcare costs, firms in most industries will struggle to simply maintain margins. Investors will reward firms able to demonstrate a path to higher sales and margins,” the bank wrote.
Goldman highlighted a bunch of buy-rated stocks expected to withstand the pressure and actually grow margins the next few years: Amazon(AMZN, Tech30), Priceline(PCLN, Tech30), Starbucks(SBUX), CNN owner Time Warner(TWX), Estee Lauder(EL), Monster Beverage(MNST), Amgen(AMGN), Bristol-Myers Squibb(BMY), Google owner Alphabet(GOOGL, Tech30), PayPal(PYPL, Tech30) and Visa(V).