The U.S. stock market, as measured by the S&P 500 Index, is up 23.4% this year and recently reached a new record high, but five signs of investor euphoria suggest growing risks, according to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. She endorses RBC’s year-end 2019 target of 2,950 for the index, 4.7% below the Nov. 12 close, according to a recent story in Barron’s.
Calvasina discussed these five signs in a note to clients:
- Asset managers have bullish positions in U.S. equity futures similar to the highs before the financial crisis, risking a big negative reaction to bad news.
- U.S. stock valuations are near their late 2017 highs.
- Earnings forecasts for 2020 are too optimistic.
- Stock prices anticipate a phase one U.S.-China trade agreement, but business confidence remains seriously damaged.
- The S&P 500 has risen nearly 32% above its Dec. 2018 low, similar to previous rallies off lows in 2010, 2011 and 2016 that paused.
Significance for Investors
“We haven’t learned anything in the current reporting season that justifies euphoric positioning and peak valuations,” Calvasina wrote. “Reporting season has been better than feared, but the overall tone around demand/macro, tariffs and cost savings all sounds very familiar–it’s what companies have been saying all year,” she added.
On the other hand, money market fund assets are $3.4 trillion, a 10-year high and still rising, undercutting the “euphoric positioning” narrative. Several strategists see this as a bullish indicator, per The Wall Street Journal.
Calvasina predicts that a pause by the Fed in cutting interest rates limits the upside for equity valuations. If 2020 earnings disappoint, as she anticipates, stock prices should sink….CLICK for complete article