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Goldman reveals 'pockets of opportunity'

The stock market will only see modest gains in the year ahead, making it difficult to pick stocks, Goldman Sachs' chief U.S. strategist said Tuesday on CNBC.

Adam Jeffery | CNBC

"The valuation of the market is at the higher end of a range of fair value and it's pretty consistent with what we've seen, in terms of economic data, broadly speaking, getting better," David Kostin said on "Squawk on the Street."

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Looking ahead, Kostin thinks the S&P 500 index could gain 2.5 percent to hit 2,000 by the end of 2014. In the next 18 months, he thinks the S&P will rise 8 percent. He expects the S&P to gain 13 percent over the next two and a half years.

"I think one of the most unique aspects of this market today is the narrowness of the expected outlook," Kostin said, referring to a consensus outlook for everything from economic growth to a narrow dispersion of both stock returns and stock valuation. "Everything's basically in a very tight cluster and that suggests again there's less stock picking opportunities. It's just a more challenging market."

In turn, Kostin recommends investors look for "pockets of opportunity" by identifying themes. Equity investors, for example, should seek to increase risk in their portfolios.

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For long-term investors, Kostin noted weak balance sheet stocks have outperformed strong balance sheet stocks by some 50 percent over the past two years. He thinks that trend could continue, too.

The technology sector is Goldman's big area of focus, though, because Kostin said it's "the most attractively valued part of the market."

Other strategies include looking for companies that are returning cash to shareholders, such as Halliburton, Northrop Grumman and Cisco Systems, he said.

By CNBC's Drew Sandholm.

Disclosure: When this story was published, Halliburton, Northrop Grumman and Cisco were clients of Goldman Sachs and had received compensation from the firm.

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