After an 11 percent rally by the S&P 500 in the last five weeks, Goldman Sachs told clients the index will be weak in the coming year, but there is still an investment strategy that can outperform.
The firm forecasts the will trade at 2,075 in 12 months, about where it is now.
"We expect stocks with high total cash returns will outperform in 2016," Goldman's David Kostin wrote in a note to clients Friday.
He added, "Although the Fed will be tightening, interest rates will remain low on a historical basis. The muted pace of economic expansion in the U.S., the uncertain prospects for global growth, and a low expected S&P 500 return, will leave investors searching for yield."
Kostin forecasts S&P 500 spending on return of capital to shareholders through stock buybacks and dividends will grow 7 percent to $1 trillion. In comparison, growth-oriented investments, which include capital expenditures, research and development, and cash acquisitions will only grow 3 percent, according to the firm.
Consequently Goldman recommends investors buy stocks in its "total cash return basket." The basket is outperforming the S&P 500 by 1 percent this year and beat the market with 16 percent annual returns versus the benchmark's 10 percent since 1995. Moreover the basket currently trades at a valuation discount of 15 times earnings versus the market's 17 times.
Here are the five Goldman buy-rated stocks in the "total cash return basket."