Goldman: S&P 500 Will Hit 2,100 By Year's End

• Despite market uncertainty, Goldman Sachs predicts the S&P 500 will return to the 2100 level by the end of the year.
• Goldman believes that the Fed’s first rate hike will come in December.
• For now, traders should buy high-quality large-cap stocks and avoid international exposure.

The S&P 500 has been on shaky ground in recent months, registering its highest volatility since the Financial Crisis and declining by 4.8 percent in the past month. A new report by Goldman Sachs analyst Davis Kostin provides some comfort for investors worried about where the U.S. stock market is headed from here.

The Return Of S&P 2100

According to Goldman, the S&P 500 will be back near all-time highs at around 2100 by the end of 2015. “S&P 500 performance following market corrections during the past 40 years suggests the index will post positive returns through year-end,” Kostin explains. He adds that, despite international worries, the U.S. economy is still growing at a rate of about 2.5 percent.

Interest Rate Prediction

The big topic on Wall Street this week has been the possibility of a Fed rate hike. However, Goldman believes that the first hike will come no sooner than December.

The S&P’s current median forward P/E ratio is about 16x, which Goldman calls “fair value.” Kostin notes that P/E ratios typically compress by 8.0 percent in the first 90 days following the beginning of a new Fed tightening cycle.

Investment Themes

Goldman advises that for now, investors should buy stocks with heavy reliance on domestic sales and avoid companies with large international businesses.

In addition, investors should seek out quality, large-cap stocks with solid balance sheets and stable earnings. The report names The Priceline Group Inc PCLN, O’Reilly Automotive Inc ORLY and Google Inc GOOG GOOGL as its three top quality stock picks.

Disclosure: the author holds no position in the stocks mentioned.