JPMorgan's 2016 Market Outlook

According to one strategist, there is limited upside to U.S. equities going into 2016, but there's potential in the beaten down energy sector (NYSE Arca: XLE).

Dubravko Lakos-Bujas, Head of US Equity Strategy at JPMorgan (NYSE: JPM), admits that while energy may be the highest risk-reward sector, he also sees it as a relative outperformer towards the end of 2016. He believes that as companies continue to struggle on the cash front, the market will see some bankruptcies and consolidations in the second or third quarter.

"At that point fundamentals start to curb the corner," says Lakos-Bujas. He adds that the sector will continue to be quite volatile throughout the year.

Lakos-Bujas sees momentum stocks as extremely expensive and crowded right now. He anticipates rising risk in the FANG stocks (Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX)and Alphabet (NASDAQ: GOOGL)) due to the momentum exposure. Heading into year-end, expect a rotation out of the momentum names and into value.

As for the Fed, Lakos-Bujas sees rising rates as a positive for financials and sees them as the best equity hedge.

While some strategists are looking for the potential impact of the the election on the markets, Lakos-Bujas says it won't have a significant effect on the market.

"When you look at the results of election year versus non-election year, republicans versus democrats taking the seat, I wouldn't really argue there is much of a significant impact in terms of the direction of the market," says Lakos-Bujas, "maybe we could expect the higher degree of volatility."

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