Goldman Sachs Raises Year-End S&P 500 Target

They also note their latest forecast is "consistent with historical returns in comparable economic environments," namely, those with a national unemployment rate between 5% and 6% (the June rate was 5.9%) and with the ISM manufacturing index above 50 but falling. (The index was 59.5 in July, down 1.1% from June.)

Looking ahead, the strategists expect the equity risk premium of stocks — the premium return over the risk-free rate of Treasury bills — will compress and offset  the impact of rising interest rates, keeping valuation multiples for the S&P 500 nearly unchanged.

Assumptions, Risks

The latest Goldman Sachs stock market forecast makes several assumptions: that Congress will approve an increase in the corporate tax rate from 21% to 25%, a minimum tax on multinationals' foreign income (perhaps less than the 15% proposed), an increase in capital gains tax for wealthy investors and a year-end 10-year Treasury yield near 1.6%. (It's currently near 1.2%.)

If the 10-year yield remains near current levels and there is no major downgrade to growth forecasts, the S&P 500 could end 2021 near 4,950, and if there's no corporate tax index it could finish the year near 4,900, according to the Goldman strategists.

On the flip side, they note that higher interest rates and tighter Federal Reserve policy would imply a 4,350 fair value for the S&P 500 by year-end.

Other risks to the forecast include the trajectory of the coronavirus pandemic and its impact on the economy (both of which are difficult to predict), an expected change in Federal Reserve policy and any surprising developments in the business or regulatory outlook of the "mega-cap" market leaders — Apple, Microsoft, Amazon, Google and Facebook, which together  account for about 23% of the market cap of the S&P 500.