Rally For Real? Goldman Joins The Bulls

Goldman Sachs strategist David Kostin, known for his bearishness, joined the bull camp today and says stocks are set up for a sustained second half rally.

In a note that's getting a lot of attention today, Kostin and other Goldman strategists upped their S&P 500 targetfrom a relative street low of 940 to 1060, a 13 percent move from current levels.

History's on their side.

They wrote: A "S&P 500 return of 13 percent over six months would be in-line with the 14 percent mean return during the six-month long "sustained rally" recovery periods after five bear markets since 1970."

Kostin and strategists raised 2009 and 2010 operating earnings estimates for the S&P 500 to $52, from $40 this year, and $75 from $63 next year. The $12 per share increase in profit forecasts for each year mainly comes from new, lowered estimates of provisions and write-downs in the financial sector. They still see write-downs of $17 per share this year and $6 next year.

The analysts also recommend investors overweight cyclicals - materials, financials, energy , tech and industrials - and underweight defensive sectors - consumer staples, health care and telecom.

They favor stocks with high sales exposure to Brazil, Russia, India and China, where they see faster growth than in the U.S. (The U.S. economy was cited as the biggest risk to their U.S. market forecast.)

"Although earnings, valuation, and money flow offer support to our view that the S&P 500 will experience a more sustained rally during the second-half of 2009, the fourth pillar of our analysis - the US economy - is the shakiest part of the foundation," they wrote.

Money flow, as a driver, should be a catalyst for stocks as mutual fund inflows increase and risk appetite grows. The strategists point out that mutual fund inflows have recently turned positive and fund cash levels are above 2007 levels. As of May 31, funds held 4.3 percent of their assets ($274 billion) in cash.

Traders have said hedge fund short-covering has been partly responsible for fueling the market's recent rally, but the strategists dispute that and say they believe mutual funds and pension funds are buying and will continue to do so. They point to statistics that show short covering certainly was a factor in April when the market was moving higher, but since May 1, the S&P gained 8 percent, with the most shorted stocks underperforming the least shorted stocks by 8 percent.

The economy is expected to see a shallow recovery in the second half of 2009 and 2010. But there's the risk a possible "double-dip" recession would lower earnings and thereby reduce Goldman's current target.

Kostin, who does not speak much to the press, was not immediately available for an interview.

Yet, in true Wall street fashion, arch rival J.P. Morgan had some thoughts on the Goldman call. J.P. Morgan's U.S. equities strategist Thomas Lee, in a note of his own, was quick to point out that J.P. Morgan has been expecting earnings to recover faster than the street has been anticipating. He said he had been using a $75 2010 EPS target and that expectation was called "outlier and unrealistic" by many investors.

"Street analysts have been slow to raise their numbers, behavior consistent with 2002-2004 when they were slow to raise numbers in the first two years of recovery...." he noted.

Questions? Comments? marketinsider@cnbc.com