“Everyone has a view on the stock market,” Goldman Sachs Group Inc (NYSE:GS) notes in a recent investment letter that says stocks are trading around fair value and will likely rise 4 percent next year.

Goldman Sachs stock market outlook

Yellen’s letter notes stretched valuation of small-cap stocks

The letter notes that last week, Fed Chair Yellen described the “stretched” valuation of small-caps while president Obama said markets should decide valuations.  Obama previous equity valuation comment, the report notes, led to a significant market rally.

On March 3, 2009,  with the S&P 500 trading at 696, Obama said ”what you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” Since this observation, the report notes, the S&P 500 has climbed by 185% and this week reached a new all-time high of 1988.

Goldman Sachs issues a sell rating on the Ten Year Treasury Note

For its part, Goldman Sachs Group Inc (NYSE:GS) issued a buy rating on stocks and a sell rating on the Ten Year Treasury Note. Goldman Sachs thinks stocks will rise over the next 12 months to 2075, primarily driven by earnings growth rather than by P/E multiple expansion. Goldman expects the Ten Year Treasury note to be trading near 3 percent at the end of 2014.

Goldman sachs s&p 500 level

The report said that earnings and sales reports are in line with their 10-year historical averages and year over year growth is reflection improving economic activity. The report notes that current company guidance is more positive than usual while second half consensus earnings per share estimates are remaining static.

The report observed that trailing four quarter margins are equal to nine percent, a new historical high, having just moved out of a range, while company management has been “less negative” in their guidance. Only 65 percent of firms provided third quarter guidance below the midpoint of mean consensus estimates.

This increased guidance has not translated into upward earnings per share revisions for the balance of 2014, the report noted. Guidance remains unchanged, which typically suggests a 1 to 1.5 percent negative revision to earnings per share estimates.

Looking forward, the report noted that next week is the last major week of the second quarter earnings seasons, with 26 percent, or 150 firms, reporting earnings.

Goldman sachs market valuation