Goldman Sachs Just Cranked Up Its Forecast For The Stock Market

Goldman Sachs has finally revised its year-end target for the S&P 500.

In a new note to clients, strategist David Kostin writes that he now expects the S&P 500 to end the year at 2,050, up from his previous target of 1,900.

That's a modest 4.2% gain from Friday's close of 1,967.

"We expect the equity rally will continue, but the trajectory will be shallow," he said.

Kostin considers the what stocks tend to do just before the Federal Reserve begins tightening monetary policy.

"Domestic economic growth is accelerating, and earnings will continue to rise, but further P/E multiple expansion is unlikely given our and the market's expectation for a Fed hike within 12 months. The improving macro data prompted our US economists to pull forward their projection for the first hike in the federal funds rate to 3Q 2015 from 1Q 2016."

Tighter monetary policy isn't an obvious negative for stocks.

"History shows S&P 500 rallies and the P/E multiple expands during the year prior to the start of a tightening cycle," he wrote.

"S&P 500 posted an average return of 17% during the 12 months prior to the three previous Fed hikes in 1994, 1999, and 2004. Excluding Tech, the average return was 12% and the median S&P 500 stock rose by 13%."

Beyond that, you shouldn't expect too much more for stocks. Kostin reiterated his 2015 year-end target of 2,100 and 2016 year-end target of 2,200.