Goldman Sachs sees a 7% upside in the benchmark S&P 500 index

The S&P 500 index jumped to a record 4,444 on Tuesday, leaving investors wondering if now would be a suitable time to take profits. As per Goldman Sachs, however, the benchmark index might not be out of juice just yet.

David Kostin’s remarks on CNBC’s “Squawk on the Street”

Goldman Sachs raised its year-end target for SPX from 4,300 to 4,700 on Tuesday that translates to an about 7% potential upside. The growth will “moderately” continue in 2022 as well, said the investment bank’s chief U.S. equity strategist David Kostin on CNBC’s “Squawk on the Street”.

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“The bottom line is that margins have been the story. The operating leverage in U.S. corporations is significant across so many different sectors. Net margins are now back to 12%, representing a more than 100 basis points increase compared to the levels seen before the pandemic. Margins are likely to stay robust in 2022 as well.”

The reason why Goldman Sachs forecasts only a “moderate” gain in the S&P 500 index next year, as per Kostin, is the tax reform which could threaten the growth rate in the future.  

Why Kostin thinks equities will be the asset class of choice?

Commenting further on the raised year-end target for SPX, Kostin said that the Wall Street giant expects the interest rate to remain low through the end of 2021 and the 10-year U.S. Treasury yield to climb to 1.6%, consequently keeping equities “reasonably attractive”.

“The U.S. FED is unlikely to raise short-term rates until the second half of 2023. That’s basically two more years of no return on cash. Bond yields rising slightly, that does not present a particularly attractive environment for fixed income, and so equities become the asset class of choice,” he added.

Kostin expects equity prices to climb over time because both corporates and households are driving demand for shares right now. Goldman Sachs’ forecast contrasts Richard Kovacevich’s (former Wells Fargo CEO) outlook who predicted the market to lose 20% or more in the next 18 months.