PUBLISHED TUE, NOV 16 202110:08 AM ESTUPDATED AN HOUR AGO
People walk along Wall Street in the financial district of Manhattan on September 29, 2021 in New York City.
People walk along Wall Street in the financial district of Manhattan on September 29, 2021 in New York City.
Spencer Platt | Getty Images

The stock market rally should continue through 2022 as the economy and government policy continue to normalize from the pandemic, according to Goldman Sachs.

Strategist David Kostin said in a note to clients Tuesday that the S&P 500 should rise to 5,100 at the end of 2022, a return of roughly 9% from here, driven by continued earnings growth.

“Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022. S&P 500 EPS will grow by 8% to $226 in 2022 and by 4% to $236 in 2023. Our EPS estimate is 2% above 2022 bottom-up consensus,” Kostin wrote. “Companies have consistently expanded profit margins despite input cost pressures and supply chain challenges.”

The firm has overweight ratings on technology, financials and health care heading into next year.

While 9% would mark a strong year relative to history, it would be a slowdown from the recent market rally. The S&P 500 has gained more than 24% so far in 2021 and has doubled since the March 2020 bottom.

One of the key uncertainties heading into next year is the actions of the Federal Reserve, where President Joe Biden has not yet nominated a chair and inflation has surprised to the upside. Goldman projected the Fed to begin hiking in the middle of next year but said higher rates wouldn’t derail the stock rally.

“After two years of near-zero interest rates, the Fed will likely begin hiking in July. 10-year Treasury yields will rise to 2% by the end of next year, but be offset by a declining Equity Risk Premium as policy uncertainty declines and consumer confidence rises,” the note said.