July 14 (Bloomberg) -- The Standard & Poor’s 500 Index will climb 4.2 percent to 2,050 by the end of 2014 as economic growth picks up, Goldman Sachs Group Inc. strategists led by David Kostin forecast, boosting an earlier projection of 1,900.
Stocks with lower valuations will outperform the market before the Federal Reserve begins tightening interest rates, the strategists wrote. Goldman Sachs’s year-end projections for the S&P 500 in 2015 and 2016 remained unchanged at 2,100 and 2,200, respectively.
“We expect the equity rally will continue, but the trajectory will be shallow,” the group wrote in a note to clients dated July 11. “Domestic economic growth is accelerating, and earnings will continue to rise, but further P/E multiple expansion is unlikely.”
Kostin’s new forecast makes Goldman Sachs the fourth most-bullish out of 19 Wall Street firms tracked by Bloomberg. The S&P 500 has been trading above Kostin’s previous year-end forecast of 1,900 for almost two months amid growing optimism that the economy was accelerating following a first-quarter slowdown.
The S&P 500 trades for 18.1 times its companies reported earnings, the highest level since March 2010.
Lower-valuation stocks and those with weak balance sheets, low returns on capital and low margins will lead the market’s gains before the Fed’s interest rate tightening, Kostin wrote.
“Viewed in relation to bonds, the U.S. equity market still appears attractively valued,” the Goldman group wrote.
U.S. stocks advanced today, with the S&P adding 0.5 percent to 1,977.10 at 4 p.m. in New York. The Dow Jones Industrial Average climbed 111.61 points, or 0.7 percent, to 17,075.42. The Russell 2000 Index jumped 0.5 percent after its worst weekly decline in more than two years.
The S&P 500 rebounded today following its worst week since April amid signs of financial stress in Europe and speculation by firms including Raymond James & Associates Inc. that stocks may be due for a pullback.
Improving macroeconomic data prompted Goldman economists earlier in the month to predict the Fed will increase interest rates in the third quarter of 2015, compared with an earlier forecast for the first quarter of 2016. The Fed will lift its benchmark rate to 4 percent by 2018, Goldman wrote.
Goldman is “quite confident that the U.S. economy is accelerating to an above-trend pace,” chief economist Jan Hatzius wrote in a report.
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