Goldman sees the S&P 500 rallying to 4,300 by end of 2021 on vaccine, divided government

Published Wed, Nov 11 20207:24 AM ESTUpdated Wed, Nov 11 20201:34 PM EST

(This story is for CNBC Pro subscribers only.) Goldman Sachs has turned more bullish about the stock market on the back of the promising vaccine news and a divided U.S. government, now expecting a gain north of 20% for the S & P 500 by the end of next year. The Wall Street firm on Wednesday hiked its year-end S & P 500 target to 3,700 from 3,600, a 4% rise from Tuesday's close of 3,545.53. By the end of 2021, Goldman expects the broad equity benchmark to rally to 4,300 — a 21% gain from the current level. The bank sees the S & P 500 reaching 4,600 by the end of 2022. "A vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency," David Kostin, the bank's chief U.S. equity strategy, said in a note Wednesday. "The much-awaited results from Pfizer (PFE) that its COVID-19 vaccine has an efficacy rate greater than 90% is a positive event that will allow society to gradually normalize during 2021." The U.S. pharmaceutical giant and its German biotech partner BioNTech announced on Monday that their coronavirus vaccine was more than 90% effective in preventing Covid-19. The news sparked a two-day rally in cyclical stocks, those most reliant on a successful reopening of the economy. The Dow Jones Industrial Average gained 3.7% this week. Tech shares sold off as investors rotated out of high-flying names and stay-at-home plays, with the Nasdaq Composite losing 2.9% this week. "The market is actually less dependent on the performance of a few mega-cap stocks than many investors perceive," Kostin said. The bank also believes the election outcome would be beneficial to the market as extreme policy changes would be less likely to become reality under a split Congress. "A divided government means little scope for major legislative changes, although trade and regulatory policy stances will likely differ relative to the Trump administration," Kostin said. Buy cyclicals Goldman upgraded health care and materials to overweight from underweight and advised investors continue to overweight industrials. The bank said these cyclical sectors could continue to lead the market gains in 2021 with the arrival of a vaccine. "We recommend investors embrace cyclical sectors during 2021 alongside a vaccine-led pickup in economic activity," Kostin said. "The beta of S & P 500 sector excess returns to changes in Superforecaster vaccine odds indicates the cyclical Energy, Materials, and Industrials sectors are likely to outperform upon the vaccine's approval." Goldman noted that the health sector now trades at its largest discount to the S & P 500 in at least 40 years. The sector typically outperforms during the months following presidential elections as regulatory uncertainty is resolved, the bank said. Materials and industrials could rally on the back of a weakening dollar as they generate a sizable share of sales overseas, Goldman said. The sectors would also be key beneficiaries of an easing of the U.S.-China trade war under the Biden administration. While Goldman expects information technology and communication services to lag in the near term, the bank said these stocks will continue to benefit from the low-rate environment in the long run. Goldman kept its overweight rating on tech. "The low interest rate regime will continue to support the valuation of sectors and stocks with superior long-term growth prospects," Kostin said.

The Wall Street Bull (The Charging Bull) is seen during Covid-19 pandemic in Lower Manhattan, New York City, United States on May 26, 2020.

Tayfun Coskun | Anadolu Agency | Getty Images

(This story is for CNBC Pro subscribers only.)

Goldman Sachs has turned more bullish about the stock market on the back of the promising vaccine news and a divided U.S. government, now expecting a gain north of 20% for the S&P 500 by the end of next year.

The Wall Street firm on Wednesday hiked its year-end S&P 500 target to 3,700 from 3,600, a 4% rise from Tuesday's close of 3,545.53. By the end of 2021, Goldman expects the broad equity benchmark to rally to 4,300 — a 21% gain from the current level. The bank sees the S&P 500 reaching 4,600 by the end of 2022.

"A vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency," David Kostin, the bank's chief U.S. equity strategy, said in a note Wednesday. "The much-awaited results from Pfizer (PFE) that its COVID-19 vaccine has an efficacy rate greater than 90% is a positive event that will allow society to gradually normalize during 2021."