With the S&P 500 near the firm's 2016 year-end 2,100 target, Goldman Sachs says the market will be flat the rest of the year, but there is still an investment strategy that can outperform.
"We expect that the index will remain at this level given tepid U.S. GDP growth, a mixed earnings outlook and elevated valuation," Goldman Sachs strategist David Kostin wrote to clients Friday.
He recommends the firm's "dividend growth" strategy, which is "a triple combination of value, yield and growth (that) will deliver alpha in a flat U.S. equity market."
Kostin sees continued mixed results from the economy, earnings and the market. The strategist cites Goldman's forecast for U.S. GDP growth of 1.8 percent in 2016 and the likelihood of negative corporate earnings revisions during the year due to low sales growth and demand.
The market is also trading at high valuations that do not leave much room for error if fundamentals get worse. Kostin states the S&P 500 is trading at the 86th percentile of seven long-term historical valuation metrics.
Consequently Goldman recommends income-oriented stocks that can generate return even if the market doesn't do well. Kostin believes the firm's "dividend growth" basket will beat the market in the next eight months as it has a higher dividend yield, more dividend growth and a lower P/E multiple than the S&P 500.
Here are seven Goldman Sachs "dividend growth" basket stocks.