Goldman drops its bearish ways, anticipates U.S. bull market

July 14, 2014, 3:56 PM UTC

Goldman Sachs (GS) is swapping its bearish outlook on the S&P 500 to become one of the most bullish firms on Wall Street, according to a note sent to clients.

The firm raised its expectations for the market for the year, setting a year-end price target for the S&P 500 of 2050 from 1900. That’s a 4.2% climb through the end of 2014 from Friday’s close, on top of the 6.5% jump the index has seen since the beginning of the year.

Such a market gain would mark an above-average year for the S&P 500 and is higher than the 1950 average expectations of 13 Wall street strategists tracked by Birinyi Associates.

“We expect the equity rally will continue, but the trajectory will be shallow,” Goldman strategist David Kostin wrote in the note.

Goldman expects economic growth to accelerate and company earnings to continue to rise, but further price-to-earnings multiple expansion is unlikely as a Federal Reserve rate hike is expected within 12 months, Kostin said.

Generally, a stock with an elevated price-to-earnings ratio suggests that investors expect higher earnings growth in the future for that asset when compared to companies with a relatively lower P/E ratio.

The note marks a change in Goldman’s typically negative market outlook. Earlier this year, the firm said stocks were “lofty by almost any measure” and was worried about earnings growth not growing fast enough to support a continued rally. Kostin’s previous 1900 S&P 500 target was surpassed in late May for the first time.

The S&P 500 is up 0.6% to 1979 as of Monday late morning, just below its all-time high of 1985.

The U.S. equity market is still attractively valued relative to bond yields, and Kostin expects low-valuation stocks to outperform before next year’s tightening. Kostin also listed 50 of the lowest valuation S&P 500 stocks, including General Motors (GM), Bed Bath & Beyond (BBBY), Wal-Mart (WMT) and Metlife (MET).

Goldman also upped its 12-month S&P 500 target to 2075 but maintained its 2015 and 2016 targets at 2100 and 2200, respectively.

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