The S&P 500 index is expected to track a near-term range of 1,300 to 1,400 before improving to 1,500 by the end of the year, Goldman Sachs senior global strategist Abby Joseph Cohen said on Tuesday.
Share price gains in recent weeks appear sustainable since US economic data look set to improve in the second half of the year, she told a news conference in Jerusalem.
"What's priced in the stock market is a mild recession with some pressure on corporate profits," she said.
The S&P 500 closed at 1,403.58 on Monday, versus its 52-week high and low of 1,257 and 1,576, respectively.
Joseph Cohen believes the market fell too far. Investors are now realizing the U.S. economy has hit bottom and that profits will look better this year than last year when many firms had large write-offs, she said.
"I am not surprised in the increase in share prices," she said. "The economy is showing signs of stability. We believe that the weakest part of the economy is right now ... In the second half of this year economic data will look a little better."
Areas like exports, growing at an annual rate of 8 percent, and capital goods spending by companies are increasing, said Joseph Cohen, who was recently succeeded by David Kostin as Goldman's US investment strategist.
Kostin's year-end target for the S&P 500 is 1,328.
"I believe that many export-related companies will show very good profits," Joseph Cohen said.
She believes that income tax rebates and a series of Federal Reserve rate reductions will give a boost to the economy later in 2008 and into 2009. "The second half of the year things will be better but not robust," Joseph Cohen said.
But that is enough for the market to stabilize and reduce volatility, she noted.
One area of concern is very high oil prices, currently above $120 a barrel, although Goldman uses a level of $100 as its base estimate for market strategy.
Joseph Cohen said that despite surging energy costs, the impact on the economy was constrained because just 10 percent of business costs were related to commodities prices.
Labor costs, equal to two-thirds of business costs, were rising at slightly above growth in productivity, she added.
Among the sectors Joseph Cohen likes are those related to information technology, since the United States is a leader, and companies dealing with alternative energy, "greentech" and health science technologies.
Although the weak dollar is a problem and is priced "too low against the euro and other senior currencies," it was having a limited impact on the economy since exports, for the most part, compete with countries that produce low-cost goods, Joseph Cohen said.
"Most products for export are value added," she said.