Not satisfied with merely “nailing the number”, Goldman Sachs' David Kostin forecasts the S&P 500's trajectory through 2015. Recognizing, as we did, that Bullish Sentiment is as highs as it gets, Kostin expects short-term weakness during the next month (the drop), earnings growth thanks to lower oil prices into mid-year (the pop), but multiple compression after rate hikes into year-end (the slop)…

S&P 500 has surged 10% since October. Our US equity market Sentiment Indicator now shows an extreme reading of 100, suggesting on a tactical basis S&P 500 will decline during the next month.

Strategically, we expect 3% GDP growth will drive 5% earnings growth in 2015 and upside exists if crude prices remain low. Rising profits will lift the market to a new high around mid-year but after the Fed hikes in 3Q the P/E multiple will slip to 16x at year-end.

We forecast the S&P 500 will close the year at 2100 and deliver a total return of 4% vs. -1% for a constant maturity 10-year Treasury.

Extreme positioning is a strong contrarian signal for subsequent equity performance

Market: High valuation and rising rates mean limited S&P 500 gain

Median stock in S&P 500 currently trades at nearly 18x forward earnings, a multiple experienced only 2% of the time since 1976. Falling interest rates and a 58% P/E multiple expansion since 2011 will start to reverse in 2015.

Source: Goldman Sachs