The inventory market is dealing with two main headwinds: Goldman Sachs

Goldman Sachs’ closely watched chief US equities strategist David Kostin doesn’t rule out further uptrends in the stock market until year-end, but admits that profits will be more difficult to generate.

“The market is facing two major headwinds in the next six months that I think will likely hold back appreciation. The first problem is higher interest rates. ” [interest]. The idea of ​​higher interest rates is usually associated with some lower valuations, “Kostin told Yahoo Finance Live.

Kostin says the other problem investors face is in the hands of lawmakers.

“The second topic is tax reform. We are literally sitting here in the middle of the year today and that should be the dominant theme in Congress for the next few months as both the potential for higher corporate tax rates are being negotiated “and the potential for higher capital return ratios,” added Kostin.

At 4,295 in early afternoon trading on Tuesday, the S&P 500 is just below Kostin’s price target of 4,300 for 2021.

If rates stay relatively unchanged through the end of this year, Kostin has the potential to hit the S&P 500, all other things being equal, 4,700. The wildcard for the market here, at least for Kostin, is the tax outlook.

The corporate tax hikes proposed by the Biden administration, while not included in the latest interim infrastructure deal, are unlikely to be forgotten for too long to gamble for a potential $ 1 trillion plan. If enforced, stocks could experience some selling pressure through 2022 as investors prepare for losses in corporate and capital gains.

“Our base earnings forecast assumes that part of President Biden’s full tax proposal will go into effect by the end of the year and will come into effect in 2022, reducing the S&P 500 EPS by 5% compared to our forecast under current tax law,” Kostin wrote in a note earlier this week. Based on these assumptions, we expect the S&P 500 to generate earnings per share of $ 202 in 2022, up 5% from 2021. “

The story goes on

Should current tax policies persist, Goldman projects S&P 500 earnings per share to grow 10% in 2022.

“So trading – if you will – for taxes right now would be owning US companies that have already paid relatively high taxes. Those who are currently paying relatively low tax rates would be clearly vulnerable to their profits being taxed higher, ”suggests Kostin.

Brian Sozzi is an editor and Anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.

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