Goldman Sachs is the latest bank to publish research trying to justify the current high level of the market as well as its year-end S&P 500 price target.

Goldman laid out its case for further equity gains in a presentation published at the beginning this month titled Where To Invest Now. Across 80 pages, the investment bank’s chief equity strategist David Kostin dissects the US equity market and find several areas that look attractive based on macro and micro trends. However, some of the most interesting analysis contained within the presentation is the top-down assessment of the S&P 500’s current valuation and outlook.

Goldman: The S&P 500 Is Not Overvalued….Yet

Goldman’s data shows that the S&P 500 aggregate and median (earnings estimate) P/Es are both expensive today, compared to history. As the chart below shows, the 35 year average forward P/E based on median estimates is 14, compared to today’s figure of 18.2.

In fact, the aggregate index is trading at its 89th percentile of historical valuation with the median stock valuation at 99th percentile. As shown in the table below, the index and its constituents are expensive on most metrics, not just P/E.

Nonetheless, even though the index and its constituents may look expensive at current levels, Goldman argues that based on historic performance, the index can trade at a higher valuation because P/E multiples tend to rise when yields and inflation fall. If you compare the current cycle of falling yields and inflation to historic cycles, the market’s current valuation does not look so demanding.

Compared to interest rates, the S&P 500 looks relatively undervalued, and for this reason, Goldman argues that the index can head higher to 2580 in the bull case.

There are some risks to this forecast, however. Goldman acknowledges that equity valuations are currently stretched relative to historic averages, even when adjusting for low Treasury rates. For example, the average S&P 500 forward P/E ratio in a nominal 10-year Treasury yield range of 2% to 3% since 1976 is 14.4 significantly below the market’s current valuation today.