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NEW YORK (
TheStreet) -- Goldman Sachs on Monday raised its target for the S&P 500 by 4% to 1,625, on expectations that economic growth will accelerate.
The analysts expect financials to lead the markets higher in 2013, as investors begin to favor growth-sensitive sectors. Life insurers, consumer lenders, asset managers and banks are expected to outperform within the financials space.
Financial stocks have rallied 27% in the last 12 months, according to Goldman, as the economy improved and housing turned the corner.
Federal Reserve's annual stress tests showed that banks have continued to make significant progress in building capital. Last week, the regulator approved the capital return requests of 16 out of the 18 largest banks, although
JPMorgan Chase(JPM - Get Report) and
Goldman Sachs(GS) were given only "conditional" approvals.
But with rock-bottom interest rates, banks continue to see margin pressure, while global macro-economic concerns continue to weigh on the market. On Monday, a decision to tax bank deposits as part of Cyprus' bailout package was roiling markets, with financials heading lower.
Still, Goldman analysts in a report published Monday morning listed five reasons why they were bullish on financials.
First, improving GDP growth will benefit bank stocks in the long run, as loan growth accelerates. Goldman's economists forecast the economy will expand by 2% in 2013 and 2.9% in 2014. Next to materials, financials are the most sensitive to economic growth, the analysts wrote.
Second, Goldman expect the yield on 10-Year U.S. Treasury bonds to rise to 2.5% in 2013 and 3% in 2014, which will help banks by steepening the yield curve. "Although we still expect [the federal funds target rate] to remain near zero until early 2016, higher intermediate yields and better growth are incrementally positive and should make investors more comfortable with the timing of eventual [net interest margin] improvement."
KBW analysts in a report on Monday also noted the strong correlation between bank stocks and bond yields, but they are more bearish on where yields are headed. "For the bond yield to move higher from its current trading range around 2.0%, we would likely need to experience a more robust job market in the U.S., with employment stats encouraging the Federal Reserve to begin reversing its very accommodative position," the analysts wrote. "Therefore, unless a more robust job market develops in the near term, Fed action is likely to keep the yield curve depressed and limit the further upside to many financial stocks."