Goldman says sell-off is not fundamental, keeps year-end forecast for market

  • Goldman Sachs analysts said the stock market sell-off is technical and about positioning, rather than fundamentals.
  • The analysts reiterated their year-end target of 2,850 and said earnings growth of 14 percent should help drive the market.
  • Rising interest rates and historically expensive prices should limit increases in valuation.

A trader wearing a 'Dow 26,000' hat works on the floor of the New York Stock Exchange (NYSE) in New York.
Michael Nagle | Bloomberg | Getty Images
A trader wearing a 'Dow 26,000' hat works on the floor of the New York Stock Exchange (NYSE) in New York.

Goldman Sachs equity strategists reiterated their year-end stock target and said the sell-off is technical in nature and driven by investor positioning rather than fundamentals.

Goldman's target for the S&P 500 at year end is 2,850, at the low end of Wall Street targets. The analysts said they left their forecasts for the S&P to rise to 3,000 in 2019 and 3,100 by year-end 2020 unchanged.

The analysts, including chief U.S. equity strategist David Kostin, said stocks should get a boost this year from better earnings growth of 14 percent, with 5 percent of the increase from tax reform. They said earnings are most sensitive to U.S. GDP growth, which is robust. Rising oil prices, a weaker dollar are also positives for earnings.

Expansion of valuations should be limited due to rising interest rates and a historically expensive market, even with the sell-off, they added.

"Following the sell-off, we recommend investors focus on cyclicals, low labor cost stocks and strong balance sheet firms," they wrote.

The S&P 500 was down about 8 percent from its recent high of 2,873. "History suggested the S&P 500 was overdue for a pullback: 404 trading days had elapsed since the market last experienced a 5 percent drawdown, the longest stretch of time in nearly 90 years! Since 1929, pullbacks of 5 percent have occurred after 92 days, on average," they added.