Goldman Sachs Upgrades S&P 500 Target

Getty Images

Goldman Sachs has upgraded its target for the S&P 500, forecasting that the U.S. benchmark index will climb a further 5 percent to 1750 by year-end, from an initial estimate of 1625, supported by robust dividend growth and an improving macroeconomic environment in the U.S.

In a report released late Monday, the U.S. investment bank also raised its targets for the coming years, expecting the index to rise by 9 percent to 1900 in 2014, and advance by 10 percent to 2100 in 2015, compared to earlier forecasts of 1775 and 1900, respectively.

"Our positive 2013 outlook for S&P 500 has played out much faster than we expected," David Kostin, chief U.S. equity strategist at the bank, wrote.

"If interest rates stay low despite better growth, then upside to S&P 500 may be greater than we currently forecast. Monetary easing by Fed, BOJ, and ECB keeps sovereign yields low and would support this potential outcome," he added.

U.S. stocks have had a bumper year, rising over 16 percent since the start of 2013, driven by improvement in the housing and job markets and commitment by the Federal Reserve to maintain a stimulative monetary policy.

(Read More:Back in Business: Jobs Picture Brightens in April)

Strong earnings and dividend growth will be a key support for the market, according to the bank. It forecasts dividend growth of 30 percent for the S&P 500 between 2013 and 2015, with 11 percent growth in both 2013 and 2014 and 9 percent in 2014.

"We expect the strongest dividend growth from information technology, financials and consumer discretionary," Kostin said, citing the sectors' large cash balances and maturing businesses.

"Apple initiated a dividend in 2012 and is now the largest dividend payer in the S&P 500. Other large payers in the sector include Microsoft, Intel Corporation, Cisco and IBM," he added.

Improving investor risk appetite and increasing confidence in the medium-term outlook for the U.S. economy underpin the bank's optimism over stocks.

Goldman believes the U.S. economy will achieve "above-trend" gross domestic product (GDP) growth in 2014, bringing an end to half a decade of weak growth.

(Read More:Strong USDollar a Headwind for Stocks ?)

While most of the fund flows into the U.S. equity market have been driven by institutional investors, Kostin anticipates a gradual improvement in retail appetite in the months ahead - another positive for the market.