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Goldman Analyst David Kostin Sees S&P 500 At 4,700 By Year End, 4,900 By End 2022

“The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” Kostin said

Goldman Sachs' chief U.S. equity strategist David Kostin boosted his target level for the S&P 500 Thursday, pegging the benchmark to rise to 4,700 points by the end of the year.

In a note published Thursday that helped stocks produce solid opening bell gains, Kostin said the S&P 500 could climb to 4,700 points by the end of this year, a move that would provide investors with a 7% return from current levels, thanks in part to a 45% year-on-year increase in collective S&P 500 earnings and the ongoing tailwind of central bank support. Kostin's prior target was 4,300 points, a level the benchmark pierced on June 29.

Kostin boosted his S&P 500 earnings estimate by 7.25%, to $207 per share, compared to "bottom-up consensus estimates of $201 and $217" thanks in part to "stronger revenue growth and more pre-tax profit margin expansion as firms successfully manage costs and as high-margin Tech companies become a larger share of the index."

Of the more than companies reporting so far this earnings, nearly 90% have topped Street forecasts, and while some forward guidance -- particularly from the biggest tech companies such as Apple  (AAPL) - Get Apple Inc. (AAPL) Report, Amazon  (AMZN) - Get Amazon.com, Inc. Report and Facebook  (FB) - Get Facebook, Inc. Class A Report -- was modestly disappointing, third quarter earnings are still forecast to rise by 29.7% to a share-weighted $414 billion.

“The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” Kostin said. “We expect stronger revenue growth and more pretax profit margin expansion as firms successfully manage costs and as high-margin tech companies become a larger share of the index.”

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The S&P 500 was marked 0.36% higher at 4,418.40 points in early Thursday trading in a move that extends its year-to-date gain to around 17.5%. 

Kostin noted that $683 billion in share buybacks -- the second-highest total on record -- have helped the index notch 34 record highs so far this year, and added that the $5.4 trillion sitting in money market funds will likely mean corporates and households will be the biggest buyers of stocks in the coming rally.

The Goldman analysts did caution, however, that the forecasts are "highly sensitive to assumptions about interest rates and corporate tax reform, each of which have uncertain outlooks."

"If interest rates were to remain near current levels (1.2% for the 10-year US Treasury yield) without a major downgrade to growth expectations or risk sentiment, the implied S&P 500 fair value at year-end would equal 4950 (+12% vs. the current S&P 500 level) and the P/E multiple would equal 23x."

Higher rates linked to Fed tightening, stronger GDP growth and faster inflation could trim that target to 4,350, Kostin said, while any failure to pass corporate tax reform could add 5% to the current EPS estimate, taking it to $222 per share and lifting the end-2021 S&P 500 target to 4,900 points.