While the investing world is busy celebrating expected gains coming their way in the three months from November through January – known as the most successful session of the stock market – Goldman Sachs’ latest prediction of a weak market next year, might be jarring to their ears.

The sought-after investment broker expects weakness in the market next year with the S&P 500 predicted to close out 2016 at 2,100. The U.S. index presently trades at 2,088.87, meaning almost no change in gains in the coming 13 months. Considering dividends, Goldman estimates stocks to return merely 3% next year, which is a repetition of this year’s scenario.

Notably, among the top ETFs, investors have seen the S&P 500-based SPY adding about 1.5%, Dow-based DIA being almost flat and Nasdaq-based QQQ advancing 10.6% so far this year (as of November 25, 2015).
As per Goldman, higher interest rates post lift-off with their resultant strength in the greenback along with a soft profit outlook are behind this pessimism in the market. Plus, Goldman hints at the overvaluation of stocks at the current level.

Added to this, Goldman indicated that P/E has a propensity to decline 10% in the six months after the first Fed lift-off, which is to take place in December, if macroeconomic conditions remain the same. While the tech sector has given a stellar performance lately, as per Goldman, ‘even tech sector profit margins have probably peaked at this point’.

Finally, Goldman projects average EPS growth at around 10% in 2016 for the S&P 500 companies – perhaps with the help of stock buyback and not entirely through operating excellence. Still this expected increment indicates an improvement from this year.

ETF Picks

Goldman suggested investors to play the stocks of those companies which generate fewer revenues from outside of the U.S. border. This way investors can mitigate the negative currency fluctuations on a rising dollar.

Goldman’s prescribed stocks are the likes of Amazon (AMZN - Analyst Report), Chipotle Mexican Grill (CMG - Analyst Report), and Wells Fargo (WFC - Analyst Report). Though Goldman’s suggestions are for the worst case scenario, we also believe less exposure to the international market could be a way to win next year. We have profiled a few ETFs below to play Goldman’s stock pick in a basket manner as this is always a safer option than single stock selection.

iShares U.S. Financial Services ETF (IYG)

Goldman’s favorite Wells Fargo takes the top spot of this $841-million financial ETF. After all, this is the right time to play the financial sector as this tends to outperformance in a rising rate environment. The fund charges 45 bps in fees and is up about 2.2% so far this year. It has a Zacks ETF Rank #2 (Buy) (read: Guide to the 7 Most Popular Financial ETFs).

First Trust Dow Jones Internet Index (FDN)

Amazon gets the first place (11.7%) in this $4.78-billion Internet ETF. The fund charges 54 bps in fees per year. In total, the fund holds 41 stocks (read: Amazon All Set for the Holiday Season: 4 ETFs to Buy).
The tech sector in any case is soaring now. From a sector look, Internet mobile applications account for 40% of the portfolio while Internet retail makes up for 22%. The ETF has a Zacks ETF Rank #2 and is up about 25%.

The Restaurant ETF (BITE)

U.S. restaurants are placed in the top 37% quartile of the Zacks Industry Rank system and are on the growth path as consumers are increasingly eating out. While the cost structure is low for these restaurateurs on falling agricultural commodity prices, many U.S. restaurants do not have much exposure to the foreign lands.
This makes BITE a nice bet. No stock accounts for more than 3.09% weight in the 45-stock portfolio. Chipotle takes about 2.43% of the fund. BITE charges 75 bps in fees (read: Time to Take a Bite into This Exclusive Restaurant ETF?).