Goldman Sachs: Get ready for only modest returns

Goldman ups S&P 500 target

Goldman Sachs told its clients on Monday that it is upgrading its outlook on the index, predicting it to hit 2,150 points by the end of this year, although it kept its medium-term projections on hold.

The investment bank's upgrade was from an earlier target of 1,900 points and would be a 4.2 percent climb for the remaining months of the year, with the index closing at 1,967.57 points on Friday.

"Stocks will climb further but the trajectory will be shallow," a team of analysts led by David Kostin said in a note released Monday morning.

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Stocks have been on a major tear in recent years with central banks keeping interest rates low and providing extra liquidity since the global financial crash of 2008. The S&P 500 clocked gains of 30 percent last year but with this liquidity slowly being tightened by the Federal Reserve in 2014, that same index has only seen a move higher by 7 percent this year.

Traders work at the Goldman Sachs Group Inc. booth on the floor of the New York Stock Exchange (NYSE).
Jin Lee | Bloomberg | Getty Images

Kostin believes that the stellar run in the last year has actually borrowed heavily from the future with equities traditionally doing well before the start of a tightening cycle. Although the Federal Reserve has recently sounded a dovish tone, many analysts predict that the central bank will be ready to start raising interest rates at some point in 2015.

Read MoreWill earnings tell the story markets need to hear?

The beginning of such a tightening period would lead to only "modest" returns for stocks, Kostin said, which reflects his unchanged outlook for the next two years. Goldman Sachs' year-end targets for 2015 and 2016 remain unchanged at 2,100 points and 2,200 points, respectively. In terms of sectors, Kostin adds that the bank is "overweight" industrials, IT and discretionary spending stocks with an "underweight" rating on consumer staples, utilities and telecoms.

The bull run for equities that begun around six years ago, and gathered momentum in 2013, has caused much debate in recent months. Some investors believe that the current runup in stocks might be running out of steam with closely watched investors like Marc Faber and Societe Generale's uber-bearish strategist Albert Edwards arguing that a correction could be just around the corner.

Read MoreIcahn: 'It is time to be cautious about the US stock markets'

Billionaire activist investor Carl Icahn told Reuters on Thursday that he thought it was time for investors to tread carefully after the bull run in U.S. stock markets.

"In my mind, it is time to be cautious about the U.S. stock markets," Icahn told the news agency. "While we are having a great year, I am being very selective about the companies I purchase.''

—By CNBC's Matt Clinch