European equities will catch up to their US peers once the uncertainty surrounding near-term elections is lifted, according to Goldman Sachs.

The Stoxx Europe 600 Index will return 8 per cent including dividends by end-2017, boosted by a weak euro, strong global growth and recovered oil prices, according to Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs in London. The S&P; 500 Index will return 4 per cent, Goldman predicts, as optimism about economic growth in the US fades and mutes the stock rally. The return forecasts are in local currencies.

"US equities will net still be up, but less than Europe, which is catching up," Mueller-Glissmann said in an interview at Goldman's offices in London. "What is generating optimism in the US right now are the tax cuts and fiscal spending, and both of those might be watered down over the course of the year. We have a pretty good set-up for Europe to do well."

Global equities have climbed since the election of US President Donald Trump, with the S&P; 500 and the Dow Jones Industrial Average setting new records this month, as investors bet his policies will boost the economy. While the optimism may have gone too far in the US, European exporters stand to benefit if Trump continues to drive a stronger US dollar and weaker euro, Mueller-Glissmann said.

"It will be tough to deliver on all of the promises while rates are catching up and valuations are extremely high," he said, referring to the US Goldman's asset allocation strategy is overweight European equities and underweight US stocks over a 12-month horizon. It's neutral on the Stoxx 600 and overweight the S&P; 500 over a three-month timespan.

Banks are among Goldman's preferred sectors in Europe this year, as they benefit from a steeper yield curve. Investors can buy bank stocks to hedge their portfolios' sensitivity to higher rates, Mueller-Glissmann said. Other strategists have warned the link between banks and bond yields will eventually fade.

Goldman predicts the Stoxx Europe 600 Index will end the year at 380, 3.7 per cent higher than its closing level on Friday, while it estimates the S&P; 500 will end the year at 2300.