June 1 (Reuters) - Goldman Sachs ( GS ) has raised its 12-month target for STOXX 600 index to 660, the U.S. brokerage said, citing resilient corporate earnings growth despite the war in the Middle East.

The pan-European benchmark index has hovered close to record highs and notched a 2.5% gain in May, although escalating tensions in the Middle East have weighed on sentiment and limited further upside.

The new target implies upside of roughly 5.4% from the index's last close of 626.

The Wall Street brokerage also lifted its three-month and six-month index targets to 640 and 645, respectively, according to a note dated Friday. There was no immediate clarity on the brokerage's previous target levels.

"Solid nominal growth, positive revisions in energy, and resilient margins across the rest of the market have underpinned the move (rally)," Goldman said, adding that AI-related optimism has also supported the rally.

The brokerage, however, said inflationary pressures and expectations that interest rates will remain elevated for longer are capping valuations, which otherwise could be higher.

While Europe does not suffer the concentration problems of the U.S. market, the rally has been driven broadly by AI-related stocks and energy sector, while consumer-related sectors have lagged.

The STOXX 600's 12-month forward price-to-earnings ratio stands at 17.55, relatively cheaper to the S&P 500 index's 27.94.

Goldman forecasts earnings-per-share growth of 10% in 2026 and 5% in 2027 for the index, with momentum slowing as higher energy costs weigh on margins.

On positioning, the brokerage said international investors continue to allocate to Europe for value and diversification, while domestic investors remain cautious due to weak economic growth and uncertainty.

"At the same time, concerns around equity supply look overdone, with appetite for the market to absorb more," Goldman added.