Goldman Sachs' closely watched chief U.S. equity strategist David Kostin isn't ruling out more upside for the stock market into year end, but he does acknowledge gains will be tougher to generate. 

"You've got two big headwinds facing the market in the next six months that I think is likely to restrain the appreciation. The first issue is higher rates [interest]. The idea of higher rates is typically associated with some lower valuations," Kostin said on Yahoo Finance Live. 

Kostin says the other issue facing investors comes at the hands of lawmakers.

"The second issue is tax reform. We are sitting here today literally in the middle of the year and that is likely to be the dominant topic policy-wise in the next several months in Congress as they negotiate both the potential for higher corporate tax rates and the potential for higher capital gains rates," Kostin added. 

At 4,295 in early afternoon trading on Tuesday, the S&P 500 stands just below Kostin's 2021 price target of 4,300. 

If interest rates remain relatively unchanged through the end of this year, Kostin thinks the S&P 500 has the potential to reach 4,700 all else being equal. The wildcard here for the market, at least for Kostin, is the outlook for taxes. 

While the Biden administration's proposed tax hikes on corporations wasn't included in the latest tentative infrastructure deal, they are unlikely to be forgotten for too long as a way to play for a potential $1 trillion plan. Should they get passed, stocks could see some selling pressure heading into 2022 as investors brace for hits to corporate profits and capital gains.

"Our baseline earnings forecast assumes that a portion of President Biden’s full tax proposal will become law by year-end and take effect in 2022, reducing S&P 500 EPS by 5% relative to our forecast under current tax law," Kostin wrote in a note earlier this week. Based on these assumptions, we expect the S&P 500 will generate EPS of $202 in 2022 (+5% growth vs. 2021)."

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Should current tax policies persist, Goldman forecasts S&P 500 earnings per share to rise 10% in 2022. 

"So the trade — if you will — for taxes right now would be to own U.S. companies that have already paid relatively high taxes. Those that are currently paying relatively low tax rates would clearly be vulnerable to having a higher tax rate imposed on their earnings," Kostin suggests.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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