Goldman Sachs is getting more bullish on stocks.
The Wall Street firm on Thursday upgraded its year-end price target for the S&P 500 (^GSPC) to 4,700, up from the 4,300 seen previously. That new target would represent an upside of nearly 7% from closing prices on Wednesday, and add to what has already been a more than 17% year-to-date gain for the blue-chip index.
Goldman also expects the S&P 500 to close out 2022 at 4,900, raising this from a previous target of 4,600.
A combination of higher-than-expected S&P 500 company earnings and low interest rates informed the firm's rosier forecast.
"We expect earnings growth will be the primary driver of U.S. equity returns in 2H 2021 and 2022, as it has been so far this year," David Kostin, Goldman Sachs chief U.S. equity strategist, wrote in a note. "Year-to-date, EPS [earnings per share] growth has accounted for all of the S&P 500's 17% price return. Looking forward, we forecast that modest equity risk premium ('ERP') compression will offset rising interest rates, resulting in an S&P 500 valuation multiple that remains roughly flat."
Goldman Sachs' baseline forecast assumes that the benchmark 10-year Treasury yield will climb to 1.6% by the end of the year, rising from its current level of around 1.2%. If rates remain where they are and no downgrades occur for growth expectations, however, the S&P 500 could climb even further to 4,950, Kostin added.
The firm's updated price target also assumes that a version of President Joe Biden's tax reform plans will get passed before year-end and generate a modest drag on corporate profits. Goldman Sachs expects the federal statutory corporate tax rate to be increased to 25% from its current level of 21%, and that "roughly half of the magnitude of other corporate tax proposals, such as the proposed foreign income tax hike, will become law, as will a hike in the upper income capital gains tax rate."
Overall, S&P 500 earnings per share will likely rise 45% over last year to $207, Kostin said, with this outlook upgraded from the firm's previous forecast for $193.
But even given the supportive backdrop of ongoing earnings growth and low rates, stocks are unlikely to see a straight trajectory up and to the right for the rest of the year, Kostin warned.
"The path to our year-end target is unlikely to be a smooth one," Kostin said. "In the near-term, we expected upward revisions to EPS estimates and declining concerns about the Delta variant spread to drive equity upside, but the path of the virus and its economic impact have proven difficult to predict."
"Later in the year, uncertainty around fiscal and monetary policy will likely drive volatility," he added. "Market participants will remain closely attuned to signals from the Fed in coming months, and equity prices will be sensitive to any surprises."
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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