Goldman: Market rally likely ahead. What to buy

Published Mon, Aug 31 201511:42 AM EDT

As U.S. stocks shake off their worst month in almost four years, Goldman Sachs predicts a market rally could be in sight. In a note to clients Friday, Goldman's market strategist David Kostin reiterated the firm's year-end target price of 2100, reflecting an upside move of 6 percent from here. One reason for the bullishness relates to the firm's view on the U.S. market recovery, which according to the firm, will continue to grow despite economic weakness in China and other emerging markets. "Continued positive macro-data will be essential if our forecast upside to domestic equities is to be realized," wrote Kostin. The August jobs report will be released on Friday. Another reason for the upbeat call is the firm's contrarian sentiment indicator, which in the past four weeks flashed "extremely low net positions," a level that has been historically correlated with gains between 2 to 4 percent during the subsequent four to 10 weeks as investors bought back stocks, Goldman research shows. Historical trading patterns from previous market corrections—characterized by drops of 10 percent or more from high to low—also show a tendency for stocks to fully recover within three to four months, according to the investment bank. Read More How to trade the S & P 500 'death cross' formation Based on that analysis, Goldman predicts the S & P 500 could approach its all-time high by December 2015. Apart from Goldman, a review of other investment houses shows that the rest of the Street is even more bullish. The average year-end price target among 14 top strategists from Wall Street, points to a 13 percent rally from here to 2,217, according to CNBC's Market Strategist Survey. One of the major hurdles ahead, according to Goldman, is valuations, which the firm defines as "elevated" relative to historical measures The median stock in the S & P 500, for example, trades at 17 times forward earnings, which corresponds to the 87th percent percentile of historical valuations since 1976, Kospin wrote in his note. Other metrics also show similar extended valuations, he added. And of course, if economic data in the U.S. begins to come in weaker than expected, the investment thesis from the research firm may not play out. The Money Play: Thematically, Goldman strongly advises clients to own stocks with high domestic revenues and avoid stocks with high international sales, mostly because of a strong dollar. From a list 50 companies that derive most of their sales from the U.S., CNBC Pro searched for the ones where the rest of the Street is also bullish. One of those names is Macy's , which derives all of its sales from the U.S. Analysts on Wall Street have a 12-month price target of $69 on the stock, implying an 18 percent gain from here, according to FactSet. Other names to make the list include Aetna, Wells Fargo, Whole Foods and Alliance Data—shares of all four names are projected to rise at least 13 percent within the next year. Read More Bottom for stocks may be in: Street

David Kostin, chief U.S. equity strategist at Goldman Sachs Group.

Scott Eells | Bloomberg | Getty Images

As U.S. stocks shake off their worst month in almost four years, Goldman Sachs predicts a market rally could be in sight.

In a note to clients Friday, Goldman's market strategist David Kostin reiterated the firm's year-end target price of 2100, reflecting an upside move of 6 percent from here.

One reason for the bullishness relates to the firm's view on the U.S. market recovery, which according to the firm, will continue to grow despite economic weakness in China and other emerging markets.

"Continued positive macro-data will be essential if our forecast upside to domestic equities is to be realized," wrote Kostin.

The August jobs report will be released on Friday.