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For stock markets, ‘flat is the new up,' says Goldman strategist

Although the S&P 500 is trading at record highs, Goldman Sachs chief U.S. equity strategist is expecting a pullback and a range-bound market for the next two years.

"It's a relatively unloved bull market," Kostin told CNBC's "Squawk on the Street" Tuesday. "You look at a variety of near term developments, I would be more cautious tactically."

Policy uncertainty, low economic growth, and decelerating corporate buybacks are among the key reasons Kostin and his team at Goldman are predicting 2 percent growth in markets over the next two years.

"Generally speaking a higher rise in political uncertainty would lead to a lower market," Kostin said.

U.S. companies with revenue overseas are more acutely at risk as the dollar climbs higher.

"That's why as an investor, the preference is for more domestic revenue exposure," Kostin said.

As global yields linger at record lows, corporate dividends can be a key as an income strategy, he said. Kostin pointed to companies like Amgen, with a 3 percent dividend yield that Kostin said is expected to grow roughly 20 percent.

"That's a characteristic of a stock we think is likely to do well in this market," Kostin said.

In an ideal world, Kostin said investors should look for a combination of both high current yields and room to grow. "But given a choice between the two I'd prefer to have dividend growth over time."

The dividend swap market, Kostin said, is implying a less than 2 percent annualized dividend growth over the next two years.

"That increased rate in dividend growth is what largely leads to an increase in a gently rising stock market," Kostin said

He said towards the end of the year though, concern in the third quarter will dissipate and the S&P will settle around the 2,100 level.

Valuations can be a concern, especially in some consumer staples, Kostin said. He is overweight telecom services, highlighting both high dividend yields and relatively lower valued stocks. Kostin and his team at Goldman are also overweight healthcare and consumer discretionary, and underweight energy and materials, and industrials.