Irrational exuberance in stocks, a condition that history shows us can last for months to years, can be very profitable for the bulls or anyone not trying to talk down the market. Goldman's equity strategist, on the wrong side of the trade, is trying to 'explain' why the market is wrong by using domestic only interpretations. Obviously, this tactic buried a lot equity strategists from 1927 to 1928, and 1995 to 1998, and so on.
The Goldman strategist points out the following:
Cognitive dissonance exists in the US stock market. S&P 500 is up 10% since the election despite negative EPS revisions from sell-side analysts (see Exhibit 1). Investors, S&P 500 management teams, and sell-side analysts do not agree on the most likely path forward. On the one hand, investors, corporate managers, and macroeconomic survey data suggest an increase in optimism about future economic growth. In contrast, sell-side analysts have cut consensus 2017E adjusted EPS forecasts by 1% since the election and “hard” macroeconomic data show only modest improvement.
The invisible, however, will certainly ignore this reasoning. Capital flows fleeing uncertainty in Europe and slowly driving up the dollar is parking in US stocks. What happens if US stocks maintain their rally as global and domestic economy contract? Confusion, followed by panic to buying when the majority realizes they've been fooled by bad analysis.
Headline: Goldman: 'Cognitive dissonance exists in the US stock market'
Goldman Sachs analysts believe investors and traders in the stock market are acting irrationally.
“Cognitive dissonance exists in the US stock market,” Goldman Sachs’ David Kostin said. “S&P 500 (^GSPC) is up 10% since the election despite negative [earnings per share] revisions from sell-side analysts.”
Earnings and expectations for earnings growth are the most important drivers of stock prices in the long run. In the short run, however, earnings and prices will often diverge.
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