Wall Street's bull market has been riding on the back of just a few stocks, and the question is what will power the bull market for a seventh year.
History is not on the side of a second year of big gains for individual high-flying stocks, so analysts are stressing careful stock picking over dart throwing at indexes or sectors.
The was barely changed on the year, but its top two stocks — Netflix and Amazon — have both more than doubled. However, historically, both names have turned in muted to negative returns in the year after great outperformance. (Tweet This)
Netflix and Amazon are part of the "FANG" group of stocks — all of which were among the 30 top individual performers in the S&P 500 in 2015. The other members are Google, now trading under holding company Alphabet, up about 45 percent year to date, and Facebook, up more than 30 percent. So, strategists are looking for leadership elsewhere and are seeking winners, among even the beaten-down names in other sectors for 2016.
The FANG group's stellar gains are a sharp contrast to the losers of 2015. As some energy stocks plummeted more than 70 percent, the S&P energy sector lost more than 20 percent and was the year's worst sector. The more than 30 percent decline in U.S. crude prices took its toll on stocks like Chesapeake Energy, CONSOL Energy, Southwestern Energy and Freeport-McMoRan, all sharply lower and the four worst S&P 500 performers.
Jill Carey Hall, Bank of America Merrill Lynch equity strategist, said it will be important for investors to pick carefully within sectors, even energy.
"From a thematic perspective, now that we're in the early innings of a Fed tightening cycle, we think anti-credit themes are going to work," she said. "Over the past 30 years, when interest rates were falling, basically small caps and credit sensitive stocks did very well over the last three decades, so we're saying, do the opposite. Buy large caps over small caps, buy dividend growth stocks over just high-yielding stocks. Buy cash-rich liquid stocks over levered stocks. Buy high-quality stocks over low-quality stocks. Those are our main themes," said Hall.
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Just four of the 10 S&P 500 sectors were up for the year. Consumer discretionary led with gains of more than 8 percent, followed by health care, up about 5 percent, information technology and consumer staples.
The debate about the longevity of the bull market continues as outperformance is increasingly concentrated in a small group of large-cap stocks. Now those leaders could struggle to keep outperforming while new areas of outperformance remain scattered, putting a premium on stockpicking for what many expect will be another volatile year.
The FANG stocks soared for 2015 even as the major U.S. averages saw their first 10 percent correction in four years last summer. The averages have since climbed back to close about 5 percent or less below their 52-week intraday highs Thursday and ended the volatile year mixed.
A technical measure of market breadth was negative for 2015. The cumulative advance-decline line on the New York Stock Exchange topped 11,000 in the spring before dropping below negative 6,000 during the late-August decline in stocks, according to Thomson Reuters. The advance-decline line recovered to 2,948 Wednesday, holding the downward slope that indicates more selective market leadership.
Analysts don't expect much of a recovery in beaten-up areas of the market until possibly the latter part of 2016, when oil is forecast to recover from near-seven-year lows.
"If you look at sector performance year-over-year, often the lowest performers will do well next year. That has not been the case the last couple years," said Jim Dunigan, chief investment officer at PNC Asset Management.
"Energy — you have the opportunity to have that reverse but maybe not until the second half," he said.
For now, oil prices are expected to remain under pressure from continued negative factors of strength in the greenback, concerns about oversupply as OPEC keeps pumping, and lack of demand, particularly from a slowing Chinese economy. The lifting of the U.S. oil export ban in late December helped push WTI to settle above Brent for the first time since August 2010.
The plunge in energy raised concerns about junk bonds, rattling the overall market. The SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx USD High Yield Corporate Bond ETF (HYG) lost more than 10 percent each in 2015.
Not much could offset that downward drag next year, as the market leaders outside of Amazon and Netflix could also face pressure in 2016.
S&P Capital IQ has a "hold" rating on Alphabet, "buys" on the three other FANG stocks, but no "strong buys."
That "implies we might have confidence in the companies and business models and ability to deliver, but not as much comfort on the valuations," said Scott Kessler, head of technology sector research at S&P Capital IQ.
The S&P 500 closed 0.7 percent lower after three years of double-digit gains, and Wall Street generally expects single-digit returns in 2016 as well.
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That muted annual gain will likely come after more volatility in 2016 as traders parse data and Federal Reserve commentary in an attempt to gauge the pace of tightening. This year, the Fed kept markets on edge for months until finally raising rates for the first time in nearly a decade in December.
Treasury markets whipsawed as well. The 10-year note yield is on track to end 2015 only modestly higher after some volatile moves this year. The 2-year Treasury note yield, most influenced by Fed rate hikes, is above 1 percent for the first time in more than 5 years as the central bank raised rates.
The U.S. dollar index gained more than 9 percent for the year, its third-straight year of gains as expectations of Fed tightening increased. Spot gold posted three-straight years of losses, falling more than 10 percent in 2015.
Read MoreOnly one global currency trounced the dollar this year
Marc Chaikin, CEO of Chaikin Analytics, said investors should stick with this year's outperformers at least for the first quarter of next year. "Beyond that, a lot is dependent on the dollar and what the Fed does," he said.
In the meantime, he is optimistic on gaming stocks like Activision Blizzard and a few select consumer discretionary names.
Activision Blizzard was the third-best S&P 500 performer and had one of its best years with gains of more than 90 percent. The stock lost 43.91 percent in 2002, after posting its best year on record in 2001.
For next year, the U.S. consumer is still largely expected to drive demand. Many analysts point to decline in unemployment, higher wages and lower energy prices as tailwinds.
"Consumer discretionary has a good chance of likely being a leader in 2016," PNC's Dunigan said, noting he expects some rotation within the sector.
"I still think in this environment, going into the end of year, discretionary, information technology, industrials, health care would be the ones to focus (on)," he said.
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To be sure, sectors aren't made equal. Consumer discretionary was the market leader but included some of the best and worst performers of 2015.
Fossil and Wynn Resorts both plunged more than 50 percent in 2015 to be among the 20 worst-performing S&P 500 stocks, while Amazon and Netflix led the pack.
Fossil is also set to be removed from the S&P 500 in January, due to the stock's diminished market cap.
Overseas equities outperformed the major U.S. indexes in 2015 as monetary policy diverged, with the Hungary BUX leading global markets with a gain this year of more than 40 percent, coming within 1 percent of its 52-week high.
The major European indexes gained about 7 percent or more for the year, but remain more than 10 percent below their 52-week highs.
According to ETF.com, the best-performing ETF is the Market Vectors China AMC SME-ChiNext ETF (CNXT), which tracks stocks on China's Shenzhen index. The index is about 25 percent below highs reached this summer, but recovered an intra-year plunge of more than 40 percent for a 2015 gain of more than 60 percent.
The larger market cap Shanghai composite is about 30 percent below year-highs but ended 2015 about 9 percent higher.
CNXT also fell considerably from June highs, when it gained nearly 130 percent for the year, to hold 52.6 percent higher for 2015 as of Dec. 22, ETF.com said.
The five worst-performing ETFs this year were all energy-related, ETF.com said. The biggest laggard was the First Trust Revere Natural Gas ETF (FCG), which lost about 60 percent, while the second-worst performer was the Yorkville High Income MLP ETF (YMLP).