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The stock market sell-off over the past month has gotten "overdone" and will be offset in part as companies return to buying back their own shares, according to a Goldman Sachs analysis that sees the market gaining close to 6 percent over the next two months.
While acknowledging some economic headwinds in the coming years, the bank's equity strategists see fundamentals still underpinning values.
"The recent sell-off has priced too sharp of a near-term growth slowdown," David Kostin, Goldman's chief U.S. equity strategist, said in a note to clients. "We expect continued economic and earnings growth will support a rebound in the S&P 500."
Concerns over rising interest rates, a weakening global economy and pockets of worries expressed during earnings calls have helped rattle markets in recent weeks. Although stocks were set for a rise Monday, the is down about 9.3 percent from its peak, while the Nasdaq tech barometer has fallen into correction territory, defined as a drop of more than 10 percent.
To be sure, Kostin's forecast of 2850 for the S&P 500 is exactly where he predicted the benchmark to end this year in his 2018 outlook piece published a year ago.
That's come amid a mostly solid backdrop. Third-quarter GDP rose 3.5 percent, according to a preliminary reading Friday.
With 48 percent of the S&P 500 reporting, quarterly earnings are up 22.5 percent from the same period a year ago, according to FactSet. However, some corporate officials have expressed worry about the road ahead, particularly concerning the impact tariffs and rising interest rates will have on growth.
Kostin said that some of those concerns are justified. For instance, Goldman figures GDP will start cooling off soon, eventually ebbing to a 1.6 percent growth rate by the fourth quarter of 2019.
"But not all assets are pointing to an imminent economic downturn," he said, citing railroads as one. Corporate credit spreads also have not widened to an extent that would suggest a major slowdown.
Companies have been in a silent period for buybacks, but that will pick up soon. Goldman has forecast total repurchases this year of about $1 trillion, which it expects to support the firm's 2,850 price target for the S&P 500.
Kostin reiterated his recommendation that investors stick to top-quality companies — low debt levels, stable sales and earnings growth, a high return on equity, and a low risk of susceptibility to market drawdowns.
That group would typically outperform as the economy slows down at the late stages of the business cycle.