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A trader works on the floor of the New York Stock Exchange (NYSE) on Nov. 15.Spencer Platt/Getty Images

Goldman Sachs expects the S&P 500 index to rise by a more modest 9 per cent by the end of next year, saying the record-setting rally is likely to cool on worries over slowing economic growth and the prospects of higher interest rates.

The U.S. equities market has been on a tear this year, with the benchmark index surging about 25 per cent as the economy recovers from the pandemic lows, driving corporate earnings.

However, Goldman’s forecast for the index was in contrast with that of Morgan Stanley, which expects the S&P 500 to move lower in 2022, with a base case target of 4,400.

Goldman is expecting the index to hit 5,100 by the end of next year. It closed at 4,682.80 on Monday.

“Decelerating economic growth, a tightening Fed, and rising real yields suggest investors should expect modestly below-average returns next year,” Goldman Sachs analyst David Kostin said in a note.

The brokerage expects net income per share to grow 8 per cent to US$226 in 2022. It had earlier raised the earnings-per-share forecast for S&P 500 companies to US$207 from US$193 for 2021, implying annual growth of 45 per cent.

Profit margins will rise by 40 basis points to 12.6 per cent in 2022, but fall in 2023 due to corporate tax reforms, Mr. Kostin added.

Even though real rates will rise, which refers to interest rate minus inflation, they will remain negative, and investor equity allocations will continue to post record highs, Mr. Kostin said.

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