While strong corporate profits in the first quarter of 2018 have helped boost U.S. equities in a period of heightened volatility, one team of analysts on the Street says the benefit will be limited as a variety of other factors weigh on the nine-year bull market. (See also: Sell-Off Signals a ‘Major Correction’: Jim Mellon.)

In a note to clients Thursday, strategists at Goldman Sachs lifted their S&P 500 profits expectations through 2020, yet wrote that they do not expect the improved climate to have a meaningful impact on equity returns, as reported by CNBC. While analysts view a continued climb in U.S. economic growth, corporate profits and stock prices through 2019, they view policy concerns as a road block outweighing some of the tailwinds. 

“The appreciation potential will be constrained by tightening monetary policy, a flattening yield curve, rising trade tensions, and the upcoming mid-term Congressional elections,” wrote Goldman's chief U.S. equity strategist David J. Kostin. 

Policy Uncertainty Weighs on Valuations

Goldman lifted its full-year 2018 earnings estimate from $150 to $159, reflecting a 19% upside from last year and below the 19.8% consensus forecast from FactSet. In 2019, strategists expect earnings growth to decelerate 7% to $170, and again in 2020 to 5% at $163. 

While profits will continue to rise, Kostin does not expect multiples to continue to increase at the same magnitude, as they have in the nine-year bull market. He expects the price-to-earnings level to remain at 17 times, reflecting a 3.6% gain for the S&P 500 to close the year out at 2,850. Goldman's 2019 forecast for the S&P 500 at 3,000 implies a 5.3% increase from the 2018 target, just half of what investors have come to expect from the market over time, as noted by CNBC.

Among policy concerns, rising interest rates stand out to Kostin as a potential headwind, noting that investors should focus on whether the gain is over 0.1% points a month, rather than obsessing over the 3% yield level for the 10-year Treasury note. A quick move in rates has typically been met with lower market valuations, according to the Goldman strategist. 

The investment bank favors growth over value and cyclicals over defensive plays, while increasing its rating on informational technology to overweight and reducing industrials to neutral. (See also: GE’s Removal From Dow Good for Investors: Goldman.)