After a disappointing March inflation report—prices contracted by 0.3 percent—analysts' have begun to scale back the probability the Federal Reserve will raise interest rates again at its June meeting. However, Goldman Sachs believes the March report was an anomaly and price pressures will continue for the next 12 months, capping the long equity rally.

"Despite the weak March core CPI print, our economists expect US inflation will resume its upward trend and overshoot the FOMC target by year-end 2018," Goldman Sachs said. "We expect core PCE [personal consumption expenditures] , the Fed’s favored measure, will rise from 1.8 percent to 1.9 percent by year-end and 2.1 percent by the end of 2018."

With an expected rebound in inflation, Goldman Sachs has revised its year-end S&P 500 target to 2,300, as cash becomes a more viable option for investors and rates head towards 3 percent by the end of the year. (See also: S&P 500 Overvalued on Almost Every Metric)

A continued rise in interest rates will put further pressure on industry margins. With over half-a-million jobs added in 2017 and the unemployment rate at an eight-year low, the Goldman Sachs Wage Tracker has risen to 2.8 percent, a level not seen since before the financial crisis. This tightening in labor market slack has pushed average hourly earnings higher, putting pressure on profit margins. "Our basket of stocks with the lowest labor costs (GSTHLLAB) has outpaced high labor cost firms (GSTHHLAB) by 1,000 bps (21 percent vs. 11 percent) since the start of 3Q 2016," Goldman Sachs said. 

"We expect this trend will continue as core inflation and wage inflation continue to rise this year."

Despite the predicted pullback in the S&P 500, Goldman Sachs says investors should remain overweight financials and energy, which historically do well in rising inflation and higher interest rate environments. (See also: How to Profit from Inflation.)

The anticipated PCE report for March is scheduled to be released May 1.

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