Goldman Raises S&P 500 Targets, Seeing Tax Cuts Lifting Profits

  • Kostin expects bull market to become longest through 2020
  • ‘Rational exuberance’ hinges on growth, low interest rates

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Improving prospects for lower taxes are prompting an erstwhile bear to sound a lot more bullish.

David Kostin at Goldman Sachs Group Inc., whose 2017 forecast for the S&P 500 Index of 2,400 is among the lowest among strategists tracked by Bloomberg, just increased his 2018 target to 2,850 from 2,500, citing an expansion in profits and valuations. That represents a 10 percent gain from the index’s close of 2,582 Monday.

Kostin cited progress of tax legislation and the strengthening economy. He anticipates a reduction in the corporate tax rate to pass early next year. The equity advance that started in 2009 is likely to last three more years, driven by “rational exuberance” that hinges on profit growth, he said. If that happens, the bull market would exceed the 10-year run during the Internet frenzy as the longest in history. 

Goldman expects S&P 500 profits to rise 14 percent to $150 a share next year and reach $158 in 2019. Also a shift from a previous stance, Kostin now expects the index to trade at a higher valuation next year as the Federal Reserve pledged to raise interest rates at a gradual pace. He had predicted higher rates would trigger a drop in valuations.

It’s “one final year of valuation expansion before multiples plateau,” Kostin wrote in a note to clients. “Tax reform and strong economic growth drive our improved profit outlook.”

The benchmark index will reach 3,000 by end of the 2019 and 3,100 in 2020, Goldman forecast.  

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