The US Economy Is Stagnant: Strategist

The S&P 500 may be trading above 1,400, but Goldman Sachs U.S. equity strategist David Kostin told CNBC’s“Squawk on the Street” he’s sticking with his year-end target of 1,250.

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“Most people have a relatively benign view of the risks involving the fiscal cliff,” Kostin said, with many expecting Congress to act on the problem during the lame-duck session following the election.

“That’s a pretty optimistic view,” Kostin added. The Goldman Strategist wouldn’t be surprised if Congress had a hard time reaching a resolution. An impasse could mean the markets witness a repeat of the debt ceiling debate from last August, which took 10 percent of the equity market in 10 days.

“Think about the contraction that would take place in the first quarter if we go over the fiscal cliff,” Kostin warned. (Related: Still Fiddling While the 'Fiscal Cliff' Gets Closer).

When setting his year-end price target for the S&P 500 Kostin looks at three factors – the economy, earnings and valuation.

“My concern relates to the fact that we have very modest earnings growth next year,” he said. “The U.S. economy is growing at a muted rate of 2 percent looking into 2013. It's hard to see why you get a big P/E expansion.”

He added that “the U.S. economy is in stagnation” which historically has meant a flat earnings multiple for the market. (Read: Goldman to Clients: Get Out of Stocks Before Fiscal Cliff Hits).

Kostin is focusing on dividend-paying stocks in the last part of the year. “The companies delivering strong cash flow and raising the dividends, I think those stocks tend to perform well,” Kostin said.