Here’s why Goldman Sachs is ‘flattish’ on SPX for H2 of 2021

The benchmark S&P 500 index has been on a roll this year with about a 17% gain so far. At 4,300, it has recovered more than 85% compared to the pandemic low in March 2020. According to Goldman Sachs’ David Kostin, however, the current level is as high as the index would go this year.

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

The chief U.S. equity strategist says the investment bank is flattish on SPX for the second half of 2021. In his interview with CNBC’s “Squawk on the Street”, Kostin highlighted three risks that aren’t priced into the market.

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“Over the next 90 days, focus will be on the tax and fiscal negotiations in Washington DC. After the legislation has passed, there will be some increases in taxes. Consequently, a wave of negative earnings revisions across the market as analysts and individual companies lower their forecasts to take into account the higher tax rates. That’s risk number one.”

The upcoming increase in capital gains tax rate, as per Kostin, is the second big risk. Historically, capital gains tax rate and equity prices are inversely related. When the former pushes higher, the latter either declines or remains flat in the best-case scenario. Consequently, high momentum stocks struggle to perform well.

SPX to gradually start climbing again in 2022

The third big risk that isn’t factored into the market, according to the Goldman Sachs’ expert, is the higher interest rate and a 10-year treasury rate that is likely to slightly increase from here to end the year around 1.90%.

Kostin expects the index to note its next move up in 2022 and end the year at around 4,600 level. He, however, agrees that if 10-year closes 2021 around 1.60%, instead of 1.90%, SPX might hit 4,700 by the end of this year.