S&P 500 to Rally 13% Through 2010, Goldman Sachs Says

By Adam Haigh and Roger Neill

Dec. 8 (Bloomberg) -- The Standard & Poor’s 500 Index may climb 13 percent by the end of next year as interest rates remain low, revenue grows and investors pour money into U.S. stocks, according to Goldman Sachs Group Inc. strategists.

The benchmark gauge for U.S. shares may rise to the 1,250 level by the end of 2010 as operating earnings per share surge 33 percent to $76, driven by an 8.9 percent increase in sales, strategists led by New York-based David Kostin wrote in a report dated yesterday. Individuals, institutional investors and companies will divert $600 billion into U.S. equities next year equal to 6 percent of the S&P 500’s market value, they wrote.

The S&P 500 has surged 63 percent from a 12-year low on March 9 as governments committed about $12 trillion and central banks cut interest rates to record lows to end the first global recession since World War II and revive credit markets. Goldman Sachs economists estimate the Federal Reserve will maintain its benchmark interest rate at 0 percent to 0.25 percent until at least 2012, according to the report.

Investors may pull money out of equity market during the second half of 2010 amid concerns about the strength of the economic recovery and before the Fed begins a process of “tightening” monetary policy, according to the report.

“Continued profit margin resiliency from prior aggressive cost reductions should drive strong returns in early 2010 and push the S&P 500 towards 1,300,” Kostin’s team wrote in the report. “We will be wrong if the Fed heads for the ‘Exit’ sooner than we expect.”

The S&P 500 forecast of 1,250 for the end of 2010 is 13 percent higher than its close at 1,103.25 yesterday.

To contact the reporters on this story: Adam Haigh in London at ahaigh1@bloomberg.net; Roger Neill in London at rneill3@bloomberg.net.

Last Updated: December 8, 2009 04:45 EST