Goldman Sachs Sees S&P 500 at 2,850 at Year's End

Goldman Sachs expects the S&P 500 Index to end the year at 2,850, only a 0.6% increase from Friday’s closing. But Goldman has several positive and negative scenarios that hinge on how escalating trade tensions play out.

So far, the tit-for-tat tariff war between China and the U.S., which has been weighing on stocks, hasn’t yet reached a resolution. Goldman says several of its clients have been questioning how a resolution, combined with strong economic growth, would affect their portfolios.

"The most out-of-consensus question we received: What if activity is better than everyone expects? … Investors remain concerned about trade and tariffs," said Goldman's chief U.S. equity strategist, David Kostin, in a note. "However, we were surprised this week when several investors actually struck a different chord, positing optimistic scenarios relative to our starting forecast."

Under a more optimistic scenario—with ongoing economic growth, no rate hikes from the Federal Reserve, and faded trade tensions—Kostin said he expects the S&P 500 could end the year closer to 3,150, an 11% upside to Friday’s close.

Second-Quarter Earnings Season

Kostin said the recent second-quarter earnings season was “stellar” with its 25% year-over-year earnings increase and revenue increase of 12%.

"The best earnings season since 2010 is now mostly behind us. Investors have quickly shifted their attention from past results to future prospects at both the micro and macro levels," Kostin said.

Under the bullish scenario, Goldman expects the S&P 500's earnings for 2019 would rise by 3%. Even without the stronger rally, several stocks are poised to outperform. (See also: 8 High-Profit Tech Picks from Goldman Sachs.)

"Given our forecast for decelerating US economic growth, investors should focus on stocks providing the fastest top-line growth," he said. "Our sector-neutral basket of S&P 500 stocks with the fastest consensus 2019 sales growth has outperformed S&P 500 by 3 [percentage point] this year. Five stocks [in the basket] have more than 25% expected sales growth (Autodesk, Align Technology, Cabot Oil & Gas, Concho Resources, and Facebook)."