A continued surge in corporate earnings will have only limited benefit for stock prices, which face multiple policy obstacles, according to Goldman Sachs.

In fact, the bank’s strategists have raised their S&P 500 profits expectations through 2020, but do not expect the improved climate to have a meaningful impact on equity returns.

“The US economy is growing, corporate profits are rising, and stock prices should
continue to climb through 2019,” David J. Kostin, Goldman’s chief U.S. equity strategist, said in a note to clients. “However, the appreciation potential will be constrained by tightening monetary policy, a flattening yield curve, rising trade tensions, and the upcoming mid-term Congressional elections.”

Goldman now estimates full-year earnings in 2018 to come in at $159 per share, a boost from the $150 original forecast. That implies a 19 percent increase from 2017, slightly below the 19.8 percent forecast from the FactSet consensus.

The increase is predicated on faster economic growth in both the U.S. and the broader global economy, higher energy prices and more help than anticipated from last year’s corporate tax cut.

In addition to the profit increase for 2018, Goldman raised its 2019 forecast to $170 from $158, implying 7 percent growth, and 2020’s from $163 to $178, indicating a 5 percent earnings gain.

However, Kostin said the rise in profits will not result in a corresponding increase in multiple, or the price investors are willing to pay compared to earnings. Rising multiples have been a key driver in the nine-year bull market.

The price-to-earnings level will remain, according to the forecast, at about 17 times. In numerical terms, that means the S&P 500 ending the year at 2,850, or about 3 percent from Wednesday’s close, and 3,000 in 2019, or 5.3 percent higher than the 2018 target. That 2019 forecast would be about half of what investors have come to expect from the market over time.

Among the biggest hurdles the market faces are continued rate hikes from the Federal Reserve, the prospect that economic growth will slow after the tax cut benefits begin to diminish, and the rising U.S. budget deficit.

“Ongoing policy uncertainty represents a key downside risk for US equity valuations,” Kostin wrote. “Many of these events pose limited fundamental risk, but could weigh on risk appetite and valuation.”

Rates are a particularly delicate issue.

If bond yields are rising due to economic growth and in an orderly fashion, that historically has accompanied stock market gains. However, if they are lurching higher — Kostin emphasized that it’s not the absolute yield level but rather how quickly the rates are moving — then that presents a problem.

While the market has been focused on the 3 percent yield level for the benchmark 10-year Treasury note, it instead should focus on whether the gain is more than 0.1 percentage points a month. That generally has been met with lower market valuations.

In all, it continues to be a tough environment for active managers as more money flocks to ETFs and other index-following passive vehicles. Just 36 percent of large-cap core managers have beaten their benchmarks this year as their mutual funds have posted just a 3.5 percent average gain, according to Goldman.

The firm noted that a majority of both growth (59 percent) and value (74 percent) fund managers have beaten the market, though Goldman favors growth over value and cyclicals over defensives going forward.

The firm also has raised information technology to overweight and cut industrials to neutral.