U.S. stocks will end 2013 higher as the economy picks up in the back half of the year, Goldman Sachs chief U.S. equity strategist David Kostin told CNBC's "Squawk on the Street" on Friday.
Kostin forecasts the S&P 500 will end next year at 1,575, implying a gain of about 12 percent from current levels. This prediction is predicated on an expansion of multiples after Kostin expected a contraction in 2012.
"Right now, as we enter 2013, the economy will be growing at around 1.5 percent on an annualized basis," Kostin said. "A year from now, it'll be growing at 3 percent on an annualized basis. That helps close the output gap and expands the multiple."
Although the "fiscal cliff" of potential tax increases and spending cuts at the end of the year has kept companies cautious about spending and investing, the strategist, said "once the fiscal cliff is addressed, companies will have greater CEO confidence and you'll see more spending."
He's predicting $1 trillion to be spent on capital investments, R&D and cash M&A in 2013, which will help further bolster growth.
Goldman expects S&P 500 earnings to come in at $100 per share this year, and grow to $107 in 2013 and $114 in 2013. Those forecasts assume margins remain steady and that revenue growth improves as the economy picks up.
Kostin predicts equities will beat credit, stocks will do better than Treasurys and cyclical sectors will do better than defensive ones.
"If you look out over 10 years, you will do better in equities than in bonds," Kostin said. "Shorter-term, we're looking a decline in the value of bonds over the next year because we have interest rates rising slowly."
In a reversal of a call from last year, Goldman also advises investing in those companies with revenue exposure to emerging markets — particularly China, instead of sticking with domestically focused companies. (Read More: Which CEOs Earn the Most?)
Corporations will also continue to buy back their stock. "You've had $400 billion of cash spent by companies in the S&P 500 each year for the last three years buying back stock," Kostin noted. "That will persist into next year."