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Expect sideways trading from here: Goldman's Kostin

The S&P 500 has rallied since Goldman Sachs pared back its 2015 earnings forecast and target, but chief U.S. equity strategist David Kostin said Tuesday his outlook hasn't changed.

The bank lowered its year-end S&P 500 target to 2,000 last week, putting the index close to the mark with nearly three months left in 2015.

"I believe you'll generally trade in a sideways direction given the valuation of the market," Kostin told CNBC's "Squawk on the Street."

In that environment, Kostin said he prefers large, domestically focused U.S. companies with stable earnings and dividends, such as Apple and Macy's.

Goldman also revised its 2015 S&P 500 EPS forecast to $109, down from $114, citing a slower-than-expected pace of economic growth in the United States and China, and weaker crude prices than originally anticipated. The new forecast represents a 3 percent decline from last year.

Goldman is still projecting the Federal Reserve to hike rates in December, and said investors should expect rising bond yields to pressure the S&P's market multiple.

A majority of market participants are nowexpecting the central bank to begin raising rates in 2015, according to the CME's FedWatch tool, which tracks 30-day fed fund futures prices.

Kostin said if the Fed doesn't raise rates, it would suggest the economy is weak and companies will have a hard time generating sales growth. It would also portend low inflation, which would make it tough for U.S. firms to improve margins.

"Lack of top-line growth and flat margins would also suggest a lower multiple than in the contrary conditions," he said.

Over time, multiple expansion is usually linked with falling interest rates and lower inflation, neither of which investors should anticipate, Kostin added.

In 2016, Goldman sees S&P 500 EPS growing 10 percent year over year to $120, down from its last forecast of $126. It expects the S&P 500 to end next year at 2,100.

"As we look into next year, the expectation is you'll have a slowly declining multiple with the economy growing slowly and rising earnings," he said. "Flat is the new up. It's a flattish kind of market."