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Forget panic over a new chapter in the euro-zone crisis, courtesy of a reviled Cyprus bank bailout. Goldman Sachs expects the SP 500 index , which has rallied nearly 9% so far this year, to keep climbing.
In a report dated Monday, Goldman equity strategist David Kostin and his team raised their year-end target for the SP 500 to 1,625 from 1,575, representing a 4% rise from Friday’s levels.
The stock-market gauge closed at 1,560.70 on Friday, within 5 points of its all-time high of 1,565.15, hit on Oct. 09, 2007. The SP 500 has approached its peak six months sooner than expected, according to the Goldman strategists.
“The 2013 U.S. equity market story is becoming one of improving business activity accompanied by increased CEO confidence,” they wrote. Recent economic data including employment growth and retail sales have been strong, while the sequester spending cuts have gone into effect and the government is still functioning, the analysts noted. Goldman Sachs expects the U.S. economy to grow 2% in 2013 and 2.9% in 2014.
The Goldman analysts recommended cyclical exposure rather than defensive stocks. They believe that financial stocks, along with industrials and materials, should outperform. “The thesis behind our bullish view on financials involves accelerating economic growth, rising 10-year interest rates, improving [return on equity], and rising dividends and buybacks,” they said.
Goldman also recommended asset re-allocation away from Treasurys and into equities for investors with intermediate and long-term horizons. The 10-year Treasury yield will likely reach 2.5% by the end of the year, according to Goldman that yield is currently trading around 1.95%.
Kostin’s colleague Jernej Omahen on Monday called the Cyprus bailout an “uncomfortable precedent” for the longer term.