Goldman Sachs strategists weighed in on the S&P 500 rally with the index returning ~17% in the first half of the year.

They attributed gains to a sharp mega-cap outperformance, which managed to outweigh recession fears and turmoil within the regional banking industry.

“Components of the return included +116 bp from better earnings expectations, +1,475 bp from a 15% expansion in forward P/E multiple to 19x, and +98 bp from dividends. The index was led by Info Tech (+43%) while Energy (-6%) dragged on performance,” strategists said in a note to clients.

Elsewhere, mutual funds underperformed, “with only 33% of large-cap funds beating their benchmark as underweights in mega-cap tech continued to weigh on performance.”

Given the market sentiment in 2023, Cyclicals outperformed Defensives by 10 pp year-to-date.

Overall, Goldman Sachs sees the S&P 500 rising to 4,500 by year-end “as a result of modest earnings growth and a roughly flat multiple.”

The index closed at 4,411.59 on Thursday.