Tags: stocks | Goldman Sachs | valuation | market

Sell Sign Seen in Stocks as Goldman Clients Get 'Unduly Bullish'

Monday, 05 January 2015 02:03 PM

If your New Year’s resolutions were to go on a diet and read more Wall Street equity research, then you’re probably ready to start cheating on both by now.

So grab a Snickers and cozy up to a computer, because this cheat sheet will get you caught up on those thick reports quicker than you can cancel that membership to the cross-fit gym.

Starting with the most urgent issue: Goldman Sachs Group Inc. strategists are warning of near-term weakness in stocks because professional investors may have grown “unduly bullish.”

The bank said its Sentiment Indicator, which compares the equity positioning of institutional and levered accounts, stands at a maximum reading of 100, which it called “an extremely stretched level.” Readings above 90 suggest the Standard & Poor’s 500 Index has a high probability of falling about 3 percent during the following six weeks, according to Goldman strategists led by David Kostin.

While prospects for an interest rate increase from the Federal Reserve are part of Kostin’s rationale for forecasting a measly 2 percent advance in the S&P 500 to 2,100 this year, his counterpart Jonathan Golub at RBC Capital Markets is more optimistic. He predicts valuations, share buybacks and profit margins will all rise this year and help contribute to a 13 percent rally to 2,325. Bull markets falter when recessions ensue, Golub wrote, and the U.S. economy is not ticking off any of the boxes that would indicate a contraction is on the horizon.

‘Progress Forward’

“While central bank policy is likely to be at the forefront for many investors, we do not expect a rising funds rate to disrupt the market’s progress forward,” Golub wrote in a note to clients.

At Morgan Stanley, strategist Adam Parker begins his “Playbook” for this year with some good old-fashioned New Year’s self-flagellation, pointing out that 2014 was the first year out of four that his team’s model portfolio didn’t beat the S&P 500. Still, he points out that his 2014 year-end forecast of 2014 made in December 2013 was only off by about 2 percent. He’s calling for a gain of more than 10 percent to 2,275 by the end of this year, based on projected 7 percent earnings growth coupled with the tailwinds of a 2 percent dividend yield and 2 percent in net share buybacks.

Gina Martin Adams of Wells Fargo & Co. advised not to be surprised by surprises. Financial markets tend to shatter the strongest consensus views, she wrote, using the surprise bond- market rally in 2014 as an example.

“The scope for a far better than expected or far worse than expected outcome is high, as volatility is likely to increase with global monetary policy shifts,” the Wells Fargo strategist wrote today.

Who knows, maybe we’ll all even surprise ourselves by sticking to that diet this year. It was only one Snickers, after all.

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If your New Year's resolutions were to go on a diet and read more Wall Street equity research, then you're probably ready to start cheating on both by now.
stocks, Goldman Sachs, valuation, market
Monday, 05 January 2015 02:03 PM
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