After meeting with a lot of their institutional clients, Goldman Sachs Group Inc (NYSE:GS) found a strong, narrow consensus that US economic growth would spring back after a disappointing first quarter, and that the S&P 500 (INDEXSP:.INX), recently past 1920 for the first time, is trading close to fair value.

“Almost all clients have the same outlook: 3% economic growth, rising earnings,rising bond yields, and a rising equity market,” write Goldman Sachs analysts David J. Kostin, Stuart Kaiser, Amanda Sneider, and Ben Snider in a May 30 report. “Improving growth, low volatility, and strong equity fundamentals suggest that riskier and more cyclical equities should outperform.”

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S&P 500 overvalued by 10% or more, but investors still bullish

Goldman Sachs Group Inc (NYSE:GS)Goldman Sachs Group Inc (NYSE:GS) hasn’t changed its multi-year S&P 500 price targets from 1900 for 2014YE, 2100 for 2015YE, and 2200 for 2016YE, implying that the market is already in need of a correction and that any further growth could set investors up for more of a setback. At 15.7x forward PE, the market is already above the long-term average, and the 17.7x forward PE is a full multiple higher than the average since 1921. Goldman Sach’s Normalized EPS metric shows the market about 10% overvalued while the Shiller CAPE has the market overvalued by at least 35%. But the investment bank’s clients argue that these numbers are too conservative, with some expecting the S&P 500 to hit 2100 this year, representing another full multiple increase, from 15.7x to 16.8x forward PE.

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Goldman Sachs: 10-year Treasury yields expected to cross 3% this year

Goldman Sachs Group Inc (NYSE:GS) suggests three possible explanations for why ten-year treasury yields have fallen again, reaching their lowest point in almost a year: weak GDP growth last quarter may simply have created a soft patch that investors will have to get through, there may not be enough AAA bonds going around to meet demand as some investors look for quality for a variety of reasons, or there could be a genuine decline in long-term outlook. Any of the three reasons could also explain the recent drop in sentiment, but only the last one might cause a sustained drag on market performance. Goldman Sachs and its clients still expect yields to cross 3% be the end of this year and then continue growing from there.

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“Under similar conditions in the past, companies with weak balance sheets, high volatility, and low valuation have consistently outperformed peers,” write Kostin, Kaiser, Sneider, and Snider. They point out that weak balance sheet stocks usually outperform when ISM is above 50, and cyclicals currently offer a 2.5 multiple discount to defensives and could be poised to outperform as GDP growth and interest rates start rising again.