Goldman Sachs raised its year-end price target on the S&P 500, citing strong corporate earnings and favorable interest rates.
The firm upped its 2021 price target on the bellwether index to 4,700 from 4,300. The new price target is 6.8% higher than the S&P’s closing price of 4,402.66 on Wednesday.
“The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” Goldman’s David Kostin said in a note Thursday. “We expect earnings growth will be the primary driver of US equity returns in 2H 2021 and 2022, as it has been so far this year.”
Kostin’s forecast is now tied for highest on Wall Street among major equity strategists tracked by CNBC with Oppenheimer’s John Stoltzfus, who raised his forecast to 4,700 as well earlier this week.
The S&P 500 is up about 17% in 2021 and earnings-per-share growth has accounted for all of that price return, according to Goldman.
Goldman Sachs’ price target hike comes as companies continue to report strong second-quarter earnings and the yield on the benchmark 10-year Treasury note has pulled back significantly from its highs in March, hovering around 1.2%.
The drop in rates has worried many investors, who believe it could be signaling an economic slowdown around the corner. The 10-year yield was near 1.8% in March.
But Goldman believes the heavy weighting of technology stocks in the S&P 500 should boost the index in a low-rate environment.
Low interest rates can push growth stock prices higher because they lift the value of companies’ future earnings. Investors tend to reach toward those high-margin technology shares when interest rates are low.
Goldman Sachs advised investors to hold longer-term positions in high-margin growth stocks and take advantage of recent delta variant fears to take short-term tactical positions in stocks tied to the economic reopening.
The firm warns that the path to 4,700 will not likely be a smooth one.
“In the near term, we expect 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,” Kostin said.
The firm highlighted tax reform in particular as a key downside risk to S&P 500 earnings. President Joe Biden has proposed to hike the corporate tax rate to 28%.
Goldman Sachs also raised its year-end 2022 target on the S&P 500 to 4,900 from 4,600, 11% higher than the current price.